Energy Sector

[Ulti]

https://oilprice.com/Energy/Crude-Oil/Explaining-The-Disconnect-Between-Physical-And-Paper-Oil-Markets.html

[SharperDingaan]

Sucks when spot-futures parity doesn't hold up 

Futures Price = Spot price *(1+ rf )– d    https://zerodha.com/varsity/chapter/futures-pricing/

 

The reality is that in this market - the spot market, not the futures market, is driving the show.

If you needed evidence of that - SA raising the price of crude by $2.80/bbl, on the same day that futures decline $10.00/bbl+. Either the folks producing the stuff are very wrong, or its the paper traders. A physical product that paper traders know squat about producing/delivering, in what is an already obviously tight market, that is clearly getting tighter ?   

 

Many would suggest that this is really governments attempting to use the futures market, to drive the spot price down, and lower prices at the gas pump. Basically, if you cant get the price down via OPEC pumping more, try using the futures market instead ? So what does it tell you - when both approaches have resulted in failure ?? 

 

We live in interesting times.

 

SD

 

[Ulti]

Don’t you think it would be smarter for the us government to use the future market to flattten out the curve and give producer an incentive to actually produce?

 

https://podcasts.apple.com/us/podcast/a-concrete-plan-to-bring-the-price-of-oil-down-right-now/id1056200096?i=1000567389279

[SharperDingaan]

1 hour ago, Ulti said:

Don’t you think it would be smarter for the us government to use the future market to flattten out the curve and give producer an incentive to actually produce?

 

https://podcasts.apple.com/us/podcast/a-concrete-plan-to-bring-the-price-of-oil-down-right-now/id1056200096?i=1000567389279

 

Pretty sure that the powers that be, know what they need to do.

The reality is that for 'legal' oil, in the short-term there are no production fixes, large enough to move the dial net of existing depletion; drill baby, drill is not an option when there just aren't the people, and supplies required. To get more oil they need a deal with Iran, moving their 3.5M bbl/day+ from 'illegal' to 'legal'.

 

There is lots of gas, and more every day as the gas cut continues to rise in the US shale fields. But with the limited infrastructure, in the short-term it's landlocked and largely stranded. New infrastructure takes a while to build, hence the difference in US vs European gas prices.

 

The reality is that additional production is limited to existing facilities, and a flatter curve for the next 12-24 months just isn't enough to warrant the rebuild/revamp required. In 24 months there could well be a new administration, and a wholly new energy policy, that strands whatever you do today. The rational thing is to extract greater efficiencies from what you already have, and leave the rebuild/revamp alone.

 

The irritant is the extreme cashflows the industry is throwing off, and its 'win' status in the economy. The presence of energy costs in most inflation components, is an additional problem. Politically, a windfall tax is inevitable, and as soon as it is imposed - goodwill goes out the window. 

 

Short of some kind of 'war time' nationalization, if you want lower o/g prices, the global economies need to go into recession. If everyone wants to keep working, the cost is higher o/g prices for the foreseeable future.

 

SD

 

 

Edited July 11, 2022 by SharperDingaan

[Viking]

If Kazakh production is cut off 1 million barrels per day will disappear from the market. Of course Mr. Market has fully priced this risk into an WTI oil price trading at $103. 12% of Chevron’s production would disappear. Exxon, Shell and Eni would also be significantly impacted. 
 

Canadian oil producers are exceptionally well positioned these days. 

—————

Analysis-Oil majors face output slump, deep losses if Russia stops Kazakh pipeline

https://finance.yahoo.com/news/analysis-oil-majors-face-output-133838289.html

 

LONDON (Reuters) - Western energy majors will cut output and lose billions of dollars if Russia, as is feared, suspends a pipeline that is almost the only export route for oil from land-locked Kazakhstan, company sources, traders and analysts say.

 

The closure of the CPC pipeline that carries oil from Kazakhstan to the Black Sea Russian export terminal in the port of Novorosiisk would shut in more than 1% of global oil supply, exacerbating what is already the most severe energy crunch since the Arab oil embargo in the 1970s.

The pipeline, which runs through Russian territory and is owned by a consortium of Western, Asian, Russian and Kazakh companies, has been in the spotlight since Russia on Feb. 24 invaded Ukraine in what Moscow calls a "special military operation".

 

Last Wednesday, a court in Novorossiisk ordered CPC to suspend operations for 30 days, citing concern about oil spill management.

A Russian court on Monday overturned the ruling against CPC and instead fined it 200,000 roubles ($3,300).

 

The sources, however, said they still thought major disruption likely. Pipeline co-owner Russia has said all stoppages are driven by technical issues.

Edited July 11, 2022 by Viking

[n.r98]

3 hours ago, Spekulatius said:

If the choice is to go with 100% energy stocks or zero, I would pick 0%. there are way better ways to protect against inflation than buying energy securities.

Rarely binary. But current cycle looks interesting vs previous cycles - strong balance sheets and cash flows and at 3-4x multiples. If underlying commod remains strong, could easily net higher $ from here and if sentiment returns, another oomph from the multiple expansion. Also oil e.g. doesnt have to be much higher, around these prices is perfect; higher prices only seem to incentivize swifter transitions and political pressures. But maybe this pov is too simplistic and some other pig has said this before.

[james22]

Every reliable poll of European newsrooms from Germany to the Netherlands show that climate change is a much more important topic for journalists than it is for ordinary people. 

 

https://www.newsweek.com/popular-uprising-against-elites-has-gone-global-opinion-1722653

[maxthetrade]

3 hours ago, james22 said:

Every reliable poll of European newsrooms from Germany to the Netherlands show that climate change is a much more important topic for journalists than it is for ordinary people. 

 

https://www.newsweek.com/popular-uprising-against-elites-has-gone-global-opinion-1722653

 

I couldn't agree more with this: 

"There is a malaise in the West currently, where ideological goals are pursued at the expense of the lower middle and working classes. Whether it's truckers in Canada, farmers in the Netherlands, oil and gas companies in the United States, ideology, not science or hard evidence, is dominating the agenda, gratifying the elites while immiserating the working class.

Ultimately, there is a risk that climate policies will do to Europe what Marxism did to Latin America. A continent with all the conditions for widespread prosperity and a healthy environment will impoverish and ruin itself for ideological reasons.

In the end, both the people and the climate will be worse off."

 

[SharperDingaan]

People will complain no matter what. However, they will complain a lot more when their home is flooded, or burnt out from forest fire. Rising sea levels breach the dyke walls, the Netherlands flood, and a great many people starve.  

 

Will it happen ? when will it happen ? what can we really do about it ? Nobody really knows.

But if we can collectively do something about it, and it works - we still all have a dry house. A lot better than praying it will never happen, and tossing around beads and holy water every now and again.

 

An individual can always leave, or relocate to the top of a mountain; but for most, that just isn't an option.

Sure, your leadership may be utter scum, but it's still a lot better than trying to do this by yourself. 

 

SD

[SharperDingaan]

The reality is that 'do nothing' is not an option. Like it or not, weather events are getting stronger and more frequent, drought/flood is much more common, and the everyday things that we all take for granted - are increasingly no longer a given. Extreme events x rising but still remote possibility of occurrence x catastrophic loss. Insurance solution.

 

But private insurance only works if the risks are reasonably predictable, and the environment relatively stable. In the extreme events, we rely on self-insurance - the state &/or your own personal wealth. The insurance 'premium' being the additional costs we all pay every day to mitigate climate change. Hopefully, the more aggressive our collective mitigation, the lower the total insurance bill will be, and the lower the total loss as/when it occurs. Rational.

 

We pay our money to the state, and the state spends it to mitigate against climate change. As/when the adverse events happen, the state gives us the money to start again. However, we're looking for certainty where there is only uncertainty, and the planning time horizon of a state is only until the next election. The state is our best, but imperfect solution. 

 

So why don't I get it ? My politician and his/her communication/propaganda mechanisms has been utter sh1te. There is a reason why the media is no longer trusted.

 

SD

 

 

 

 

 

Edited July 12, 2022 by SharperDingaan

[james22]

1 hour ago, SharperDingaan said:

The reality is that 'do nothing' is not an option.

 

Sure it is. Get rich now, deal with the problem (made inconsequential) later.

 

1 hour ago, SharperDingaan said:

The state is our best, but imperfect solution. 

 

Yeah, yeah: Green on the outside, Red on the inside.

[james22]

But this is off-topic.

 

Let's agree to disagree, SD. Have the last word if you'd like and let's return to energy as an investment.

[Sweet]

Our understanding of history’s temperature records are based on proxy measurements which can be impacted by any number of things.  We date those indirect temperature measurements using carbon dating which can be out by many thousands of years.

 

By contrast modern climate data is a composition of real-time measurements of just about every aspect of weather imaginable.

 

There is a major mismatch in both the directness of data but more importantly the resolution of data.  One is indirect that at best can be placed within a few thousand years the other is effectively an live data stream of a comparatively small period in the Earth’s life.

 

That poses a serious problem for the claim that weather is changing today like never before in our history.  Quite simply we don’t have the data to say.

 

Thats not to say man-made activity doesn’t cause warming.  Anyone who thinks CO2 doesn’t have a warming effect is a loon.  However does a change from 0.02% of CO2 in the atmosphere to 0.04% cause catastrophic climate change?  I doubt it.

 

 

[Viking]

Oil prices are back up to $98. Oil stocks have been crushed. Fears of recession appear to be trumping supply/demand fundamentals - for now.
 

It will be very interesting to see how Biden’s trip to the middle east goes this weekend. The following article sums up what a complete shit show the US relationship with Saudi Arabia has become. This just adds more complexity to the energy problems the world is facing.
—————

Why Biden's Saudi trip has proved so thorny

- https://www.bbc.com/news/world-us-canada-62144217

 

Why is this so controversial? 
 

America's decades-long dealings with Saudi Arabia have traditionally involved a trade-off between US values and strategic interests. 

But President Biden explicitly emphasised human rights in the relationship, and now, as he bows to the political realities that shape it, he risks losing credibility on his values-driven approach to foreign policy. 

 

The grisly murder of Khashoggi united both sides of Washington's partisan divide in fury. A journalist and prominent critic of the crown prince, Khashoggi was killed and dismembered in Saudi Arabia's Istanbul consulate.

 

As a presidential candidate, Mr Biden drew a categorical line in the sand, vowing to make the kingdom a "pariah" because of its grim human rights record. He used that sharp rhetoric to contrast himself with former President Donald Trump's unreserved embrace of Saudi Arabia. Mr Trump once boasted he had "saved [MBS'] ass" from the outcry over Khashoggi's death.

[lessthaniv]

Another article along the same vein.

 

https://oilprice.com/Latest-Energy-News/World-News/Biden-Likely-To-Leave-Saudi-Arabia-With-No-Oil-Supply-News.html

 

The oil patch is cheap. I've built positons in CNQ as a core and added SGY,VET,WCP and MEG as well. The dividends are begining to flow now and looking at the incredible FCF yields they are spinning - the current stock prices against future potential dividends look like double digit yields on many in the sector. With such low FCF multiples on $80-$100 oil, the reserves are really been given no value. 

 

Goldman stressed tested and are calling for north of $100. 

 

https://oilprice.com/Latest-Energy-News/World-News/Goldman-Sachs-Remains-Bullish-On-Oil-Prices.html

 

 

Edited July 15, 2022 by lessthaniv

[Gregmal]

https://www.cnbc.com/2022/07/15/biden-fist-bumps-saudi-prince-mbs-after-jamal-khashoggi-killing.html
 

LOL, taking the headline approach apparently. Maybe he forgot what happened to Khashoggi. That was a long time ago. 

[Spekulatius]

I have stated in the past that in order to be successful investing (or speculate)  in commodity stocks, you need to be right about the direction of the underlying commodity. Sure there are company idiosyncratic issues, but for the most part, it is the direction of the underlying commodity that determines the outcome.

 

Here is an example I pulled together from an another sector - mining. RIO is a miner but predominantly , their most important commodity is iron ore(roughly 75% of their cash flow). Now if you create a chart of the underlying commodity and the RIO share price, you will find that they correlate quite well:

 

The conclusion seems simple - you need to buy RIO (or Iron ore futures) when Iron or is cheap. RIO is pretty good because they are a low cost producer with BHP and Vale so nobody really can underbid them at the low points without taking heavy losses. So RIO is unlikely to go out of business.

 

I think pretty much the same applies to all other commodity stocks. The only way to relatively sure way to win is to buy when the commodity is cheap. if you own a low cost producer that can't go out of business, there is almost no way you can lose money short of an exogenous event (nationalization, fraud, severe operational issues with mines etc).

 

I also think that it makes little sense that a miner with long life resources trades up so much with iron or spot prices, but I can't argue with Mr Market and I don't make the rules. Anyways, make of this what your want. I think it applies well to energy and oil stocks as well. but there are other factors at play here, as the market structure seems to be a bit foggier than with iron ore. For once with Oil, the low cost producer is Aramco and other Gulf states, not the ones the people typically buy. Aramco can be bought, but has political risk and trades also based on that.

 

 

FWIW, I think RIO is starting to look attractive here.

 

 

 

Edited July 15, 2022 by Spekulatius

[LearningMachine]

21 minutes ago, Spekulatius said:

I have stated in the past that in order to be successful investing (or speculate)  in commodity stocks, you need to be right about the direction of the underlying commodity. Sure there are company idiosyncratic issues, but for the most part, it is the direction of the underlying commodity that determines the outcome.

 

Here is an example I pulled together from an another sector - mining. RIO is a miner but predominantly , their most important commodity is iron ore(roughly 75% of their cash flow). Now if you create a chart of the underlying commodity and the RIO share price, you will find that they correlate quite well:

 

The conclusion seems simple - you need to buy RIO (or Iron ore futures) when Iron or is cheap. RIO is pretty good because they are a low cost producer with BHP and Vale so nobody really can underbid them at the low points without taking heavy losses. So RIO is unlikely to go out of business.

 

I think pretty much the same applies to all other commodity stocks. The only way to relatively sure way to win is to buy when the commodity is cheap. if you own a low cost producer that can't go out of business, there is almost no way you can lose money short of an exogenous event (nationalization, fraud, severe operational issues with mines etc).

 

I also think that it makes little sense that a miner with long life resources trades up so much with iron or spot prices, but I can't argue with Mr Market and I don't make the rules. Anyways, make of this what your want. I think it applies well to energy and oil stocks as well. but there are other factors at play here, as the market structure seems to be a bit foggier than with iron ore. For once with Oil, the low cost producer is Aramco and other Gulf states, not the ones the people typically buy. Aramco can be bought, but has political risk and trades also based on that.

 

 

FWIW, I think RIO is starting to look attractive here.

 

 

 

 

 

If BHP and RIO were legally allowed to collude on prices, or if Brazil and Australia were to form a cartel, iron could be interesting.  Until then, only one commodity in the world has a cartel to look out for prices long term to make sure producers are getting their fair share of the world economy. 

Edited July 15, 2022 by LearningMachine

[Spekulatius]

@LearningMachine - OPEC only controls about 37% of the crude supply and they have not shown any ability to control the prices - otherwise the crude prices would not be that volatile.

https://www.statista.com/topics/1830/opec/#dossierContents__outerWrapper

 

Iron ore has 3 large producers VALE, RIO and BHP and the largest customer is China (but end consumers are elsewhere because a lot of the iron from China gets re-exported as goods). I think Iron ore has a price floor around $75/ton at which point anyone except the big three does not make any money.

 

That's what I like about iron ore - it is more a natural resource based commodity than a political one. It's also relatively cheap now (iron ore trading around $100-105) historically while energy is quite expensive.

 

I also don't like with energy that the low cost producer (Aramco) is not investible for me.

Edited July 15, 2022 by Spekulatius

[LearningMachine]

4 hours ago, Spekulatius said:

@LearningMachine - OPEC only controls about 37% of the crude supply and they have not shown any ability to control the prices - otherwise the crude prices would not be that volatile.

https://www.statista.com/topics/1830/opec/#dossierContents__outerWrapper

 

Iron ore has 3 large producers VALE, RIO and BHP and the largest customer is China (but end consumers are elsewhere because a lot of the iron from China gets re-exported as goods). I think Iron ore has a price floor around $75/ton at which point anyone except the big three does not make any money.

 

That's what I like about iron ore - it is more a natural resource based commodity than a political one. It's also relatively cheap now (iron ore trading around $100-105) historically while energy is quite expensive.

 

I also don't like with energy that the low cost producer (Aramco) is not investible for me.

 

Couple of things:

• #1. The global price of oil is based on the highest cost barrel it needs. 
• #2. Oil demand is very inelastic.  So, if the world needs 100 mboe per day, it can't live on 63 mboe.   

So, that 37% share effectively gives OPEC the power to set the global price. 

 

I think OPEC has actually done pretty well for its member-countries.  Look at how well Saudi royal family is able to live and have money left over for the country for doing nothing but just having oil reserves.

 

I wouldn't measure OPEC's success by OPEC being able to maintain the oil price every day, e.g. during the covid time, but whether over long times, it is able to get its member countries and producers a fair share of the world economy.   Even during covid times, within a few months, they were able to get the price moving back up.  In 1973, they were able to bring the western world to its knees and get their fair price in gold.  Yes, due to some infighting, they were not as effective in 1980s and 90s, but they started getting effective again as time went by. 

 

If it were not for OPEC's power, Biden wouldn't have to go to begging there.  You don't see Biden going and begging BHP and RIO.  If BHP and RIO tried to collude, the legal system would just take care of it right away. 

Edited July 16, 2022 by LearningMachine

[StevieV]

5 hours ago, Spekulatius said:

Here is an example I pulled together from an another sector - mining. RIO is a miner but predominantly , their most important commodity is iron ore(roughly 75% of their cash flow). Now if you create a chart of the underlying commodity and the RIO share price, you will find that they correlate quite well:

 

WTI and the XOP ETF have correlated well over the last 1 and 2 year periods, but XOP has extremely underperformed the price of the commodity over the last 5.  Over the last 5 years, WTI has advanced 109% versus a negative 9% for XOP.  Can say a lot about that, but the briefest is - the E&Ps are being valued much less richly vis-a-vis oil prices than they used to be.

[Viking]

31 minutes ago, StevieV said:

 

WTI and the XOP ETF have correlated well over the last 1 and 2 year periods, but XOP has extremely underperformed the price of the commodity over the last 5.  Over the last 5 years, WTI has advanced 109% versus a negative 9% for XOP.  Can say a lot about that, but the briefest is - the E&Ps are being valued much less richly vis-a-vis oil prices than they used to be.

i think most analysts are saying where oil stocks are currently priced makes sense for oil priced at about $65-$70 or so. The fact oil is $98 is comical. This suggests to me there is NO DEMAND for oil shares currently. Big institutional investors (anyone who has to pay attention to ESG) cannot touch oil/energy stocks; they are probably still selling down positions. 
 

So the price of oil stocks might not provide much information (on its own) to investors. The silver lining is oil companies are printing money. And most of them are buying back stock. Should share prices stay at these low levels AND oil prices stay north of $80 to $90, oil companies will be buying back a significant number of shares. Cheap share prices will just become another reason NOT TO GROW PRODUCTION (it will be more accretive to simply buy back shares on a risk adjusted basis). It will be super interesting to hear what management teams of oil companies have to say about capital allocation in the current environment when they report Q2 earnings in a couple of weeks. Specifically their low share price and stock buybacks.

Edited July 16, 2022 by Viking

[Stuart D]

@Spekulatius any thought on FMG as another low cost iron ore producer?

[Spekulatius]

2 hours ago, StevieV said:

 

WTI and the XOP ETF have correlated well over the last 1 and 2 year periods, but XOP has extremely underperformed the price of the commodity over the last 5.  Over the last 5 years, WTI has advanced 109% versus a negative 9% for XOP.  Can say a lot about that, but the briefest is - the E&Ps are being valued much less richly vis-a-vis oil prices than they used to be.

XOP contains crappier companies than XLE so what I imagine happens is that in every downturn (2015, 2020) , some go bankrupt or in dilution hell, so the equity in those is toast. There is no recovery from your equity being toast and only partially from dilution at the bottom. That is why I imagine those ETF undercover m the underlying equity.
The other reason is that while equities follow directionally spot prices, its not (and should not be) a one to one correlation. Equities  should rationally trade based on LT cash flows, not on spot prices. LT cash flows depend on the prices in the future and the expect stunk for those are reflected in the crude future a few years out. Right now a quick loom shows that crude futures for Dec 2025 futures trades for ~$70/brl and that is why E&P companies are valued as if crude trades at around these values.

 

 

I have no view whether these assumptions are correct. If you do think these prices a will rise, you should think about trading specific crude futures rather than oil stocks, imo,

.

[LearningMachine]

30 minutes ago, Spekulatius said:

I have no view whether these assumptions are correct. If you do think these prices a will rise, you should think about trading specific crude futures rather than oil stocks, imo,

 

Thanks @Spekulatius for sharing how markets are pricing in much lower oil price when valuing oil companies. 

 

I think oil futures are really hard to predict with high probability.  We all know what happened during covid times, and can't predict what future events might bring at what moment.

 

I think owning oil reserves through oil companies are easier to predict because they can do well as long as we have an effective cartel because even if there will be unpredictable volatile times when oil prices would drop, just give the cartel some time to adjust supply to get the prices up to get its fair share as the cartel proved during covid times. 

 

And, don't forget you are getting all that FCF during that time with the oil companies, unlike oil futures that will just sit there like gold. 

 

If I were to measure value of USD roughly, based on just Subway food prices, USD has lost more than 50% of its value compared to before covid.  In 1973, OPEC decided to price oil in gold. Now, If OPEC were to price oil in terms of subway and other equivalent items provided by US economy, I think they would want to be able to keep their buying power as it was before covid.  So, they would probably want to price oil at roughly twice it was before Covid, and who knows how long this inflation runs going forward. 

 

Edited July 16, 2022 by LearningMachine