Still an Oil Bull, Lame or Not 13 comments
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Barron's Magazine has a great interview (subscription required) with Charles Maxwell, Senior Energy Analyst, Weeden & Co.
How high do you think the price of oil will go from here?
We will see $300 a barrel -- or roughly $250 in today's dollars -- because oil supply will be so short. If you want that oil, that's what you will have to pay for it. That will be in 2015, after the peak of oil [supply]. But even earlier, around 2010, more than 50% of the non-OPEC world will have peaked in its production of oil so the dependence on OPEC will become extreme. That will give OPEC a chance, I'm afraid, to lift prices rather more quickly on us than they are doing today.
[click to enlarge]
I have been and remain an oil bull. Obviously, with the recent drubbing of oil prices, my portfolio has taken some huge body blows. In the graph above, you can see how stock prices for ExxonMobil Corporation (XOM), Suncor Energy Inc. (SU), ConocoPhillips Company (COP), and BP p.l.c. (BP) have moved relative to West Texas Intermediate oil prices over the past two years. Although recent weeks have not been kind to my portfolio, my overweighted commodities exposure has protected me from the market's negative returns so far this year.
Please note the following two items: one, the left axis, Stock Prices, does not begin at zero; and two, if you click on the graph, you will be taken to a larger version.
The above graph is somewhat difficult to interpret because it is hard to see the relative movement between stock prices and oil prices. Notice, however, that on 16 August 2007, Exxon was at $79.25 per share while oil was at $70.99, and a little more than one year later on 5 September 2008, Exxon was at $75.62 per share while oil was at $109.38. Even though oil prices moved up about 50%, Exxon's stock price was actually lower. I find that interesting. The next graph shows normalized prices, which more easily shows relative price movements.
[click to enlarge]
During the past two years, the companies' stock prices did not enjoy the same rise as oil prices. Suncor trended along with oil prices but did not reach the same peak. And BP's stock price has actually fallen—both on an absolute basis and on a relative basis to oil prices over the past two years.
In hindsight, I should have lightened up on my oil exposure, especially after the tremendous run we have enjoyed. As I tell my friends, I have no idea where oil companies' stock or oil prices will go in the short term, but in the longer term, I am bullish. Still, that is no excuse for not having taken some profits. Even though I remain bullish, I should have lightened my position and waited for an opportunity to reload.
Eric Bolling in a recent TheStreet.com article, Bolling: Avoid Urge to Get Even, wrote the following:
I believe that the dollar is still the world's safest currency, contrary to many pessimists that write investment newsletters - many of whom can't pull the trigger on their bad energy calls. Many of them followed Goldman Sachs' $200 oil call like sheep to the slaughterhouse. Many of them bury their bad call on oil in the form of, "We said long term oil bull." Lame!
At one extreme, you have aggressive traders, such as Eric Bolling, who are going to trade in and out of the markets. At the other extreme, you have successful investors, such as Jim Rogers, who are not aggressive traders and who believe that commodities bull markets still have several more years. I am not an aggressive trader, though I could certainly benefit from being more aggressive than I am now. All that said, I am still pleased with my performance considering how difficult the markets have been.
Oil is a difficult commodity because it does not trade on pure fundamentals alone. Oil production is not determined solely by the marginal cost of production. Rather, it is heavily influenced by geopolitical forces. That can be either a positive or a negative. It might be positive in that some countries will arbitrarily take production off the market to prop up oil prices. These countries might believe that $100 per barrel is a reasonable price for oil. Other countries might be inclined to increase production to accomplish at least two aims: one, to make up lost price through increased volumes; and two, to drive prices downward to increase price volatility, which in turn discourages new sources of high cost production such as the oil sands in Alberta. So even though oil prices have come down substantially, the future is still hard to predict.
The challenge now is to decide how to act going forward. Obviously, I missed a great opportunity to lighten up. Some believe that oil prices might continue to plummet further and getting out now is a good idea. While that might be true, I am inclined to stay with my current positions, even if it is lame. And should stock prices fall precipitously, then I will add to my positions. These additions will be shorter term rentals rather than longer term holds.
Disclosure: I am long Suncor, ExxonMobil, and TheStreet.com (TSCM).
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This article has 13 comments:
you should factor in new supply, specifically high-quality syncrude from illinois/west kentucky high-volatile bituminous coal via 2-stage hydroliquefaction (Wilsonville AL 1982-85).
> kack
At what price does oil become economically unviable??
If fuel goes from 30% of airline costs to 60%, will people fly as much? The cancellation of 8% of current flights says no.
80 to 100 $ oil started the demand destruction that caused the 1 billion people that use the most oil to use 10% less oil for transportation, thus proving that a large percentage of oil will not be bought at any price.
Doubling of gasoline prices would make the extra cost of a CNG duel fuel car pay for itself in less than a year for most people.
This leads me to believe that $250 in current dollars won't happen.
This isn't early1980s when the Alaskan pipeline came online, and the North sea oilfield, plus the giant Mexico oilfield,Cantrell, began production.
This time,unless technology intervenes, we are going to set a new price floor for oil because its damn difficult to process Oilsand, Bakken Shield and Barnett Shale.
This drop in gasoline IS demand destruction. Miles driven has fallen as much as gas usage. There has been no time for American drivers to switch to smaller and more efficient cars. Europeans already have those cars on the road, and their gas usage is down substantially as well.
Commodities are more valuable than fiat currencies. Yes, $250 a barrel is on the way, but oil will hold its value rather than the dollar. It's hopeful but wistful thinking that my salary will rise as quickly as the "price" of oil.
www.fhwa.dot.gov/ohim/...
I'm a commodity and infrastructure bull. Nothing that has occurred during the last two months have changed my opinion. Eating and energy are crucial to our survival ---- which is more than I can say about video games and i-Pods.
I have taken advantage of the dip in commodity and infrastructure prices --- which has made for many a sleepless night. In the long run, however, demand destruction may lessen our needs, but tighter supplies will counter that factor.