Jack Walker

Red Flag: Oil's Faltering

Brad,

How much of the current weakness can be attributed to usual seasonal weakness that is not yet apparent?

Jack

Oil Market Dithers as Funds Buy

Brad,

Can you provide some more details of the Money Managers Index?

What's included?

Thanks,

Jack

World Series of Crude Oil: Winner Decides Winter Gasoline Prices

Bob,

Some of the major oil companies, such as BP, also have trading operations. How do we know they are not complicit and participating with Goldman and Morgan on the long side regardless of the supply and demand fundamentals?

If so, it makes one wonder what the CFTC and Department of Energy are doing.

Jack

Peak Oil for Dummies

Lionel,

Thanks for this contribution, you must have spent a great deal of time in its preparation.

Jack

The Energy Markets According to Stupak

Brad,

Thanks for keeping us up to date on these important developments.

It sounds like Rep. Stupak has it about right.

As previously expressed we view long term investment in commodities by non commodity participants as price distortion sending the wrong pricing signals to producers and user alike thereby providing incorrect data on which they base long term capital commitments distorting the entire capital allocation process in the industry.

Secondly, it the “bona fide hedge” exemption was eliminated perhaps the swap market would be curtailed thus reducing this activity which could prove to be beneficial for some price stability.

Jack

How to Handle Energy Speculation: Interview with Chris Cook

Lara,

Speculators have a role to play, but a “Commodity Investor” is an oxymoron since commodity price discovery is incongruous with investing.

Commodity markets are for short-term price discovery not for long-term capital investment. Is there any wonder why futures contracts have a limited life span?

How could the trustees of long-term pension assets be hoodwinked by the “middlemen” brokers that their participation was consistent with their fiduciary responsibilities for long-term capital growth? What seemed to be a good asset diversification strategy for one pension fund is a disaster when they all do the same as it distorts the short-term supply and demand relationship sending inappropriate price signals to both commodity producers and users.

Jack

When Will the Oil Price Pop?

Jim,

Congratulations on a well prepared fundamental effort to forecast crude oil prices. We wonder if the fundamental approach is just too complicated with multiple unknown and politically influenced variables that preclude forecasting price levels with any confidence.

Until recently, we thought the best source of supply and demand data was generated at the NYMEX in the commodity futures markets. Recently our confidence in the market pricing forecast approach has been shaken by the apparent attempts of large speculators to circumvent margin, position limits and reporting requirements of the CFTC in an effort to obscure their activity. Until we get some additional information about the CFTC investigations that began last summer into OTC and ICE trading of crude oil contracts we remain skeptical about pricing data from the futures markets. If you have any information about these investigations, we would appreciate you sharing it with us.

Jack

Cacophony in the Oil Market

Brad,

How much reliance can we place on the Commitment of Trader’s reports since much of the trading has gone OTC and no longer reported? This was an issue last summer, but I have not seen any recent information as to the resolution of the issue.

Is the ICE trading included with NYMEX in the CFTC report?

Do you think we can place as much reliance on the net short position of the commercials as we may have in the past?

Jack

Oil Price Economics the 60 Minutes Way

Eddy,

While you are certainly right to support the concept that speculation plays an important role in the market process perhaps it would be good to back up and look at the bigger picture.

There are important differences between the Commodity Futures markets and the equity markets. The Commodity Futures market is a price discovery market where buyers and seller of commodities exchange their views on market conditions by executing financial commitments in an effort to determine the supply and demand clearing price. The equity markets are for raising long-term investment capital and serve a completely different function than the futures markets.

The argument is being make that institutions who manage long-term investment capital such a pension funds and endowments have lost the distinction between the function of these markets in their effort to generate short-term gains. In the process, due to their financial size, they have distorted the normal price discovery that takes place in the Commodity Futures market to the detriment of both producers and users of many commodities. In their effort to secure above normal returns for institutions of their size they found ways around the normal and established practices of position size limits and then moved their trading off of the exchange in order to avoid reporting and to obscure their activities.

At this point, no one is saying speculation does not play a role in the markets. The legitimate question revolves around the issue of institutions responsible for long-term investments directing their capital to short-term price discover markets thereby distorting the price discovery process. The argument is they should limit their long-term investments to the equity markets that are more suitable for their large investment capital. It is a basic and fundamental suitability argument.

Jack

Energy Investing: Scenarios for a Turnaround

Jim,

Perhaps one answer to the oil stock investor’s dilemma is to use a strategy that provides a defined and limited risk while staying in the game. This can be done by starting with a high quality integrated company that is not over leveraged and then buy a long term options bull call spread.

For example: ConocoPhillips (COP) 45.59. Here is an integrated with a debt to equity ratio of .24 that is not likely to run out of cash. Consider:

Buying the Jan 50 call YROAJ at 9.775 and then selling the Jan 55 call YROAK at 8.15.

The difference is the cost of the spread and is indicated above using the mid-prices between the bid and offer of 1.625. In order to get this spread, be prepared to pay a bit more, perhaps 1.75. For a one-lot position of 100 shares the cost is therefore $175.

The upside is limited to the difference between the strike price or 5, less the cost of 1.75 for a maximum gain or 3.25, which is almost twice your investment. In the meanwhile, if the recover is still years away, and oil price do not recover in the next year, the total loss is limited to the original debit cost of $175. In addition, since the position is long one option and short another it is insulated from changes in options implied volatility and time decay.

The large integrated oil companies trade with good options volume so the important options liquidity is available. XOM and CVX are two others to consider.

With this strategy an oil stock investor can stay in the game, limit risk and have a goo potential gain if oil prices recover in the next year.

Jack

1,238 Billion Barrels of Oil Reserves: Is This an Oil Price Bubble?

Estimated reserves are a function of estimated future crude oil prices less estimated future production costs. Has this been considered and included in the "Statistical Review of World Energy 2008"?

My Crude Oil Futures Strategy

Jim,

In the event you are right and we do get higher crude oil prices you may want to consider using a options bull call spread on the crude oil future contracts. This gives you part of the upside from the higher prices should they occur but a much smaller yet defined downside in the event crude prices don't go higher.