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Oil serves as an excellent economic barometer. Walk down the aisles of any store, and the effect of the economy on the price of oil is displayed. From an input cost in plastics to the cost of transporting goods to market, oil greases the wheels of commerce.
As we have entered the worst recession since the 1930s, it is unsurprising to see the cost of oil collapse. From a peak above $145 per barrel in July 2008, oil dropped to a low of $31.41 in five months (78%). During this price drop, the technical dynamics of the futures market became prevalent.
Futures contracts allow a person to buy or sell oil at a specific point in time at a set price. If you are an airline company looking to secure fuel for March, 2010, or an energy producer looking to lock in the price of a barrel of oil ten years down the road, the futures market helps. The price you commit to defines the nature of the market and indicates where prices are headed.
When oil was dropping to $31 per barrel, the market moved to contango. With a market in contango, the price of oil is higher the further you go into the future. For example, West Texas crude (WTI) on ICE trades for $47.17 in April, $47.83 in May, and $48.85 in June. Such a term structure allows profits for the investor who can buy oil today, take delivery, and then sell the same barrel in the future. Markets in contango are bearish and point to lower prices.
Since the commodity in question will be driven into storage to take advantage of the large spread, excess supply is available to satisfy any increase in demand. Only when demand becomes so large that the contango narrows and then disappears has the excess supply been removed from the market.
As the contango has narrowed dramatically over the past few weeks (one month ago the difference between the April and May contracts was $4.46 versus $0.66 today), oil has moved higher. This is the first sign that oil has bottomed. I expect the price movement to continue and eventually result in a market where the futures months sell at a discount to the current month (backwardation). As contango is bearish, backwardation is bullish since all available supplies are rushed into the market to satisfy increasing demand.
Expecting oil to move higher, we must address the best method of becoming long. Although ETFs that track the price of crude are available, I will take a slightly different approach. When oil bottomed in mid December, ConocoPhillips (COP) and XTO Energy (XTO) were trading for $48.46 and $34.52, respectively. With oil now near $47 (52% higher), COP and XTO trade for $36.12 (25% lower) and $30.52 (12% lower), respectively. Simply put, two well-known energy producers now offer the ability to purchase their shares at large discounts to the price of the underlying commodity that drives their business. Instead of share prices increasing with the additional value of their balance sheet reserves, we have seen the opposite. Within this difference lies opportunity. Expecting the price of oil to continue increasing and the market to recognize the value of the reserves each company controls, in my weekly newsletter EPIC Insights, I recommend positions in XTO and COP as this week's fundamental trade.
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On Mar 17 08:42 AM epeon wrote:
> I agree with the basic thesis that oil is going to go higher. However,
> COP has a very high percentage of its business from natural gas.
> And, frankly, I am not so bullish on natural gas. I, therefore,
> do not like COP. A different major would be a better choice for
> me (I own BP, for example).
Could modern preemptive "liberation" wars perhaps really be primarily about consolidating the control of the flow of this modern globalized society lifeblood to take control of this lifeblood and build pipelines through important formerly soverign countries under various pretexts? Could the wild gyrations in oil prices which affects price and viability of all other energy sources & the price of the production and transportation of basically everything be part of the EndGame strategy to destroy confidence of investors in all markets be part of the plan to further consolidate control of this lifeblood and the markets that depend so heavily upon it? Could their media reporting and ratings agencies, which are being highly scrutinized obvious conflicts of interests, be further compounding these underlying forces upon investor and consumer confidence, which undoubtably affects the overall markets in general?
Contango spreads on oil and the volatility (VIX) of the general commodity and stock markets are most certainly gyrating and spreading out as never before, creating arbitrage opportunities for speculators, especially for inner circle traders "in the know" of where markets are trending, whether moves by big mover-shakers are planned in concert with one another by any means or not. Again, certain alternative energy plans by companies with publicly traded stocks, in addition to plans for conventional oil exploration and production companies are undoubtably affected by the low oil prices lately. Heavy down pressure on oil prices due to the global economic downturn, especially over any prolonged period of time, not only delays or scraps medium range plans for all kinds of conventional and alternative energy companies, but already has brought into serious question the very viability of so many energy companies, especially in the alternative energy sector, as well as governments in countries like Russia, Iran and Venezuela, that have economic and business projection models based upon oil/energy prices being much higher than those of recent months. Oil prices below $50-60/barrel, as well as low natural gas and commodity prices could very well be a strong incentive for certain allied countries that are openly not friendly to the USA to begin a seemingly minor conflict over anything at all, justified by reality or propaganda, which could quickly escalate in a domino effect to something much larger and wider, with profound effects in order to fuel renewed speculator investment in oil futures markets to push prices higher, even potentially much higher in a process that could feed upon itself as last summer, 2008, and perhaps beyond...
Countries like Iran, surrounding the Straight of Hormuz, the bottleneck at the south of the entire Persian Gulf, need oil prices above $60/barrel to just break even. Incidentally, Iran is in a unique position to muddle the watters in the potentially dire straight, for supertanker passage, as well as the overall global economy and fragile economic recovery, which has largely assumed and potentially depends upon very low oil prices during the recovery period, which many "experts" have projected to be near $30/barrel for a prolonged period of time. What if the widely assumed model of low energy prices for the forseeable future is flawed, not taking into account powerful geo-political plans and forces at work behind the scenes? In a world full of central banks using a strategy of quantitative easing, printing virtually unlimited amounts of fiat currencies to inject into local and global economies related to their stimulus plans... Could hyper-inflation be in a possibly stacked deck of cards in the not-so-distant future of the "global economic recovery"? Any conflict at all in a volatile oil producing region like the Persian Gulf would almost certainly cause speculators to re-enter the oil futures markets, as well as all other futures markets that are directly and/or indirectly tied to the oil trade. Take for instance the Iran nuclear issue, something that has strangely almost fell off the radar of mainstream news media coverage lately, for whatever reasoning. Iran and their plans for Israel has certainly not become less of a potential powderkeg geo-political issue, regardless of whether or not it has been in the media spotlight which has largely been focused on the global economic recovery, government bailouts, massive fraud schemes such as the Bernies of the world, and excessive abuses of executives and employees at failed nationalized banks and other businesses, most notably of late, AIG. The highly distractive nature of these apparent outrages has almost eliminated the Israel/Iran headlines lately, as Israel forms its new government and Robert Gates remains Defense Secretary in the new Obama administration. Has US foreign policy planning genuinely fundamentally changed, or may we see similar or far more of the same? Something for prudent investors to think about as it relates to the global lifeblood trade, as well as everything else that hinges upon it. The USDollar index and OIL typically trade inversely to one another, as the US government has long enjoyed complete USDollar hegemony in global oil markets, requiring central banks of global governments to hold large dollar reserves.
Contango Comprende? The recently released movie by Alex Jones, THE OBAMA DECEPTION, whether right or wrong, has certainly set-off a firestorm of debate over its conclusions, among liberals and conservatives, Democrats and Republicans, Christians, Patriots and Secular Socialists. Since its release over the internet, the huge amount of YouTube views seems to be growing exponentially, as may be the case with the price of oil in the not-so-distant future according to certain people that have supposedly received leaks from the supposed "insiders club" of NWO global elites who allegedly plan world events in advance together, with precision based upon the leaks to be coincidental. Could it be true that the Republican/Democrat debate is really only a smokescreen for A NWO Global Elitist USSA Republicrat Agenda? If so, then most of the widely reported projections from the so called "experts" may need to be prudently considered in a totally different light.
The underlying global geo-political forces at work have more of an effect on the price of oil and everything, regardless of any personal political leanings or opinions by any so called "experts" we hear from on the news. History has shown over and over again that certain elites and institutions have hugely benefited from a "good crisis" every so often. Could history be repeating itself now? Perhaps we shall all soon see. Regardless, it's a good idea to not hold all your eggs in any one single basket as one Bernie has made perfectly clear recently. That's a good way to get AIG all over your face.
My personal opionion based upon my own research of historical trends and those that seem to repeatedly benefit from massive market drops with accompanying massive loss of consumer confidence is that almost all of the eggs end up in fewer and fewer baskets, usually owned and/or controlled by international BanKing institutions, that after all, are the ones printing and/or financing the corporations that seem to survive and consolidate the ones that aren't as fortunate.
One thing is for sure... The current global economic meltdown is unlike anything the world has ever experienced prior. Perhaps it's prudent to re-consider all government/corporate business models that have worked in the past accordingly. The "too big to fail" doctrine seemingly driving so much money creation, financing, spending and abuse is a new paradigm added to the modern mix. Could it be possible that central bankers and/or governments that have historically been considered "too big to fail" may be worth questioning in a world floating on fiat debt creation? What if China decided to dump their massive USDollars and USDebt suddenly? That's a doomsday scenario that most "experts" will not even condsider. Yes, we have a history of being co-dependent global trading partners, however, if China sees USDollar hyper-inflation being inevitable in the not-so-distant future from all the "money creation", it's something to at least seriously consider. Perhaps this very paradigm shift may be a driving force behind China's recent spending spree, buying up almost every kind of commodity producing company they can get their hands on internationally, for pennies on the currently strong USDollar... After all, the Dragon is Awakening, their economy that they are domestically stimulating is still growing (albeit slower than double digits at the moment), and that Dragon is a beast that must be fueled and FED!!
Could the "Commodity Bubble" of last summer just be a baby burp compared to the coming Commodity Spike of 2009, fueled by overall loss of confidence in massive "money" creation by global central banks, which even the "experts" agree now will inevitably result in inflation (or perhaps hyper-inflation)? We'll see.
Paper is cheap and printed. Real Money is Mined and Minted (at least according to the US Constitution). I personally like believe in converting at least some of that flood of paper into the real thing with intrinsic value. Perhaps SpOIL may be a sort of currency of choice for global governments if financial and geo-political turmoil continues, rather than abating... After all, regardless of decades of long-winded speeches from Presidents and other politicians about US "energy independence", it is one thing that has consistently proven to be nothing more than HOT AIR. Like it or not, ALL OF US (except Brazil) are still addicted to the flow, the grease, or THE LIFEBLOOD of all modern societies... OIL.
Happy St. Patrick's Day & Happy Trading!!
Regarding COP and other oil majors, I am attracted to the triple-A credit rating of XOM (Exxon Mobil) in today's shaky market and feel it should be a strong consideration in purchasing and holding shares.
Problem is that it always trades at a discount, so unless you think it will become more of an equal and the discount will disappear, no reason on this basis to favor COP.
XOM is always cash rich, but to me it is like one of those midwestern quarterbacks, predictable,not too creative.
I favor CVX as a better combination of innovation, good dividend, and it is still a very healthy major oil company.
Am bullish and long on CVX.
COP 10 year chart showed 50% retracement to $37.00 area possible. I waited 6 months for the price to fall ( given the fact that the indexes were all down to levels seen a decade ago, it seemed like a likely outcome), then bought some and sold the $55 call. Also did a protective put spread against that position. It's easy to sleep nights with COP in my portfolio. Meanwhile, the dividends will come in handy, to reinvest as the stock rises.
Russia's aggressive attitude towards Europe and the countries that have NG pipelines.
Nigeria may well fall to muslim fundamentalists using terrorism to topple the go'vt
Venezuela is out of its league trying to manage its oil resources.
Iran --- could be a hot spot fairly soon
Saudi Arabia can't boost production like they say
Idiots in the U.S. congress won't allow exploration for oil
Mexico is on a downward trend in production
What is going to tip the scales against oil?