BrotherMaynard

Best Investments for Rising Oil

Not a very good -- these sort of platitudinous assumptions offered up by the author are similar to the idea that trees grow to the sky and its amazingly easy to see how this sort of careless temperatment got us into the housing mess.

"Almost every investor is aware that oil supply is getting harder to find, while oil demand from growing economies is rising."

Well, if you are a contrarian, this is a red alarm. "Almost every investor..." is like saying "everybody knows land is finite and population is growing, so housing prices are going up forever." In addition, the author didn't really offer any evidence/data to support his statements, much less for anybody to refute, but I guess just assuming he is right is good enough? That's how you lose money, in my opinion.

"Furthermore, underinvestment in oil industry infrastructure leaves open the door for an energy shock if a global economic recovery"

Again, this guy is bringing nothing to the table...no statistics, just a headline that you can read on most any newspaper or blog...in other words, every capital market on the planet has priced this in. Nobody should risk capital (short or long) based on these platitudes alone.

"Barrels are priced in dollars, so as the value of dollars fall, the price per barrel will rise."

I understand this correlation is undeniable. But the causation is flat out erroneous. Look for this correlation at any time during the 90's...it didn't exist, and for good reason. Pricing oil higher because the dollar fell is double counting. The currency markets, prima fascia, are responsible for repricing all things on a relative basis. For instance...my house is priced in dollars, so ceterus paribus, my house is worth more because of the dollar fell? You never hear Shiller or CR talk about the dollar being a tailwind for houses. It's fundamentally no different for oil and investors are asking to get burned by assuming this is a sound fundamental reason for risking capital.

"Remember that the next time some part-timer tries to sound wise by pointing out that the leveraged ETFs are calculated on a daily basis -- as if you didn't know that by now, and as if it means they can't work for periods beyond a single day."

This author could've offered some valuable insight, but instead decided to drop ad hominems. So i will attempt to add some insight to leveraged ETFs...Going long a leveraged fund is being effectively short volatility. As volatility falls, you should do OK. But as volatility rises, your returns will indeed erode. So for example, when the VIX hit 90, people lost money hand over fist, no matter which side of the leveraged bet they were are on. In the world where VIX is 20-30, they should probably do OK. But again, doing the leveraged thing is taking on unecessary risk because it adds the fate of the VIX into your total return.

Is Oil Going the Wrong Way, Or Do We Need to Adjust Our Perceptions?

i would be scared to death to do anything other than follow the trend with tight stops. this oil market makes no sense. fundamental/technical drivers seem to always be ex-post. no positions.

5 Reasons Natural Gas Is Poised to Bounce Back

Im guessing this piece refers to the US nat gas situation as the structural realities there are very different from other geographies.

Either way, this article is exceedingly vague, and is filled with platitudes that were once famous during the energy boom-bust of the last 6 or so years...it is this sort of faulty reasoning that has since lost lots of money for lots of people.

To quote article:

re: pts 1 and 2: "Most investors fail to look beyond this next week- even though, in most cases, their time horizon is much longer. They’re doing it again in natural gas right now...that’s why natural gas prices are so low right now."

and then the author totally contradicts himself with his next point

" When demand falls, prices fall. When prices fall, supply falls. It’s a basic rule of economics. Right now, the rules are hitting natural gas."

Well which is it? Is it investors or supply/demand moving prices? Both? Are you getting equities mixed up with commodities?

Equities suffer from extrapolation bias that klarman refers to, given that they are the present value of future earnings. But a commodity is the present value of...well...its spot price. There are no future cash flows in a commodity. Again, extrapolation bias does not even apply to natrual gas much less any other commodity. Now it applies to natural gas-driven equities. But if we're talking about risking hard-earned capital on an idea, don't you think we should at the very least get the most basic characteristics of the vehicle correct?

re: pt 3: "It’s rare to find oil in the ground without natural gas. And vice versa"

This seems to be one of those vague assertions backed with no data.

US natural gas production from shale has spiked (see here: tonto.eia.doe.gov/dnav...) while US crude prodution has flatlined (see here: tonto.eia.doe.gov/dnav...).

"History shows, when oil prices rise, natural gas prices follow "

Obviously no data to back this one either.

So the most recent example shows that the "btu relationship" certainly didn't hold on the way down. Last Oct Nat gas was $8 and crude was still hovering around $100. There was plenty of talk rife with the notion about how nat gas would appreciate back to 12-13 right quick and close the "btu gap."

Obviously that's not what happened. Oil tanked in half from $100, thus following nat gas' lead on the way down. So what's to say nat gas at 3.75 isn't pre-saging $25 oil?

The point is, there is a lack of wide-spread infrastructure that allows switching between nat gas and oil (in the US) to create any sort of correlation that which investors can have any conviction in...so why get fancy when you clearly don't have the tools? Just use GDP as the common denominator.

Again, the narrowing of the crude/ng gap is an awful reason to risk capital.

"There are many ways to protect and actually increase your wealth during periods of inflation...One of the best way is to own real assets."

Based upon the authors reasoning for investing in commodities, thus far, it would be more wise to stick to TIPS as an inflation hedge.

"Natural gas will be a clear benefactor of the cap and trade legislation"

So invoking klarman's quote again...what's to say this isn't the extrapolation of the current administrations' leanings into a permanent change in the future of the US' energy consumption mix? What if obama is gone in the next 4 years, and we just get a slow and measured approach to energy consumption change? What if it costs too much? The point is, to assume that cap and trade is in the bag is absolutely ludicrous. It is this sort of presumptuous banter that will put you at more risk than you otherwise should be.


two questions that the author might want to consider:

What are the effects of LNG on the future of the US nat gas complex?

Does the falling margins of energy service companies, and thus, the falling cost for E&P's have anything to do with E&P's future profitability and/or incentive to drill?

Commodities Will Lead the Recovery - Matt McCall

consumption is the match that ignites inflation. without a decent level of growing consumption there is no inflation. The reason why there is not a growing level of net consumption is because the financial system is in ruins. That is why financials will lead us out of this mess. Until financials show some semblance of normalized health, we are going nowhere.

And just using common sense, financials led us in to this mess, starting all the way back in early 2007. In fact, if everyone recalls, commodities didn't tank until we were 6 months into this recession (July 08). So the fact that commodities were the last ones to join this recesssion leads one to think that they will be the last to appreciate during the recovery cycle. Financials mend first, then the consumer, then tech, then industrials and materials. Financials and consumers are the ultimate drivers of demand for materials...inflation is merely a by-product.

Trend Reversal in Oil

This is the fourth month in a row that oil is doing its head-fake. CL front month is caught in a feedback loop. The lack of storage capacity is at the heart of it. As expiry rolls around the front month contract sells off as nobody can take delivery (Cushing is full). The next month contracts get bought up on the roll and pop back to the fourties. Oil can't go any higher, otherwise everybody that has been storing oil will dump it, pushing prices back down. Its going to take a genuine demand upturn to eliminate the massive overhang of excess oil and break this loop (alternatively, the CFTC could actually enforce position limits on the USO wich holds some 60k contracts...the main offendor when it comes to distorting the roll)

Buying USO Is a No-Brainer

Nothing is a "no brainer" in investing. That sort of cavelier and careless attitude has lost a lot of people money in this environment.

Who's to say oil and commodities won't face a lost decade? They rode the tails of easy credit just like everything else. The scarcity meme only works when supply and demand are tight. And considering that this is the worst downturn since Jimmy Stewart hailed glad tidings to the movie house, supply and demand are not going to be tight for some time.

Its easy to see why commodities look so good...for the past 8 or 9 years, they've been multi-baggers...but so has Chinese growth. I'm still wondering who China is going to export to, esp. given that the majority of their growth is geared for exporting only. The ravenous demand out of china was merely the inputs necessary for their massive exports to the Western world.

If anyone learns anything in this mess, its that you shouldn't extrapolate at extremes. Commodity demand reached a pinnacle (along with credit) and investors continue to extrapolate that demand trend, which is clearly a thing of the past (along with credit). That's the variant view.

Oil Refiners as Proxy for Demand

refining is a brutal biz right now...end demand for refined products is in the tank (historically speaking) yet input costs have doubled over the past 6 months. can't think of a sound economic reason for this to happen. i suspect financialization has something to do with driving up prices, despite demand being historically low, and supplies being historically high. in addition, it doesn't take much to corner the brent/wti physical markets as there aren't but a few hundred thousands bbls per day being pumped of each.

Natural Gas: Could This Be the First Bullish Chart?

"Guy Adami of fast money who is very savvy said UNG is aplay here"

in all of his savviness did he bother to mention that ung is trading at a 15% premium to NAV?

That's in addition to the fact that ung owners are already are paying a negative roll yield (fyi...12 month nat futures spread is almost a 1 bagger...finance.yahoo.com/q/fc...).

ung is a mess - it almost reminds me of that guy at the end of robocop 1 that crawls out of the cesspool only to be made instant road kill by that speeding paddy wagon.

see more here: ftalphaville.ft.com/bl.../

Speculators Keep the Market Liquid

if nobody is there to buy a commodity, it should fall in price. just like if there is nobody there to buy a house (aka mortgage), it should fall in price.

yet, if a speculator is there to buy and keep the commodity from falling in price (i.e. stuff onto a ship and float it off the GOM), have the true fundamentals of supply and demand been born out?

this "liquidity at any and all cost" mentality is nuts.

Fundamentals Don't Support Oil at $55-60 a Barrel

nice article. good luck w/ that position, btw.

just to add to the speculation debate, last wednesday, the new CFTC Chairman, Michael Dunn, was quoted (link below):

"We were told to look at significant price discovery contracts and we have been doing that,"...noting that preliminary reports suggest "it was much larger than we originally thought" and that staff was "surprised" by the preliminary findings."

This, in no uncertain terms, is Dunn admitting that ICE contracts did in fact have an effect on oil prices...this, in direct contrast to what the CFTC reportedly this time last year. Funny how that works.

Link: www.easybourse.com/bou...

Beaten Down Natural Gas Likely to Stay Down, Making Producers a Short

From a note put out by Gil Yang at Citi, today:

"We believe that natural gas prices below the cost of marginal reinvestment is no longer sufficient to balance the market. Instead we believe that prices may need to fall below the marginal cash cost of existing production to incentivize shutting in production from existing wells. Thus, prices may need to fall to below marginal cash production costs which are probably in the $2-3.50/Mcf
range.

Our new commodity price forecasts reflect this view where we are setting 2Q and 3Q prices to levels anticipating several weeks of gas falling to ~$3.50/Mcf and below and possibly below $3 for a short time later this year."

Oil Rises Again: What Does it Mean?

higher prices are not the result of anything fundamental. we still have massive oversupply, evidenced by the 80m bbl floating offshore; Cushing filled to the brim; ballooning OPEC spare capacity and awful demand numbers.

the bounce is dumb money flowing into etf products in the hopes of getting in on the "dollar weakness" trade. This trade is, in and of itself, ludicrous, as oil's appreciation is due to nothing more than paper chasing paper.

In fact, I would argue that these higher oil prices are going to impel the speculative oil that is in storage to be dumped on to the spot market, putting abnormal pressure on spot prices. The evidence of this could be found in the weekly EIA reports, which would likely show a downtick in cushing supply, but abnormally large overall builds in commercial stocks.

Until there is a genuine uptick in demand, oil is going to have a tough time sustaining itself above $50 for any multi-week period of time.

My Problem with Chesapeake Energy's New Deal

"The market wants them to "really" live within cash flow. I don’t think they want to believe that."

Excellent point. I think its a symptom of an ideologically driven CEO/management. This sort of denial is absolutely devastating for shareholders. Steve Jobs (i'm long aapl), John Mackey (WFMI), Bernie Ebbers, Sandy Weill are/were all ideologues...denying what needed to be done, in favor of what they wanted to be done...all at the expense of shareholders.

BBG reported that CHK was a bankruptcy risk

www.bloomberg.com/apps...

It uses the Z-score methodology and, like any model, can't capture the entire essence of what makes a business tick.

either way, what i'm annoyed about is how mcclendon won't elaborate on what happens to the PnL and balance sheet if these nat gas prices persist or even reach 2002 levels. Yes, we know eventually supply/demand must balance, but the fact that he isn't candid about the potential for lower prices and refuses to plan more than a few quarters ahead, is disconcerting, to say the least.

no position

Exxon Apostasy: A Closer Look at the Oil Giant's Real Valuation

thanks for the original analysis. I couldn’t agree more that E&P’s in general are wildly overvalued at these energy prices. Credit suisse finally mentioned that (published via barrons):

“At $45 [per barrel] oil and $6 [per MMBtu] gas (2009 curve currently at $44.25 [per barrel] oil and $6.00 [per MMBtu] gas), the stocks are trading at a 37% premium to NAV, with the gas-focused names at a 43% premium and oil E&Ps at a 22% premium.

At $40 [per barrel] oil and $5.50 [MMBtu] gas (closer to current spot prices), the E&Ps are trading at a 65% premium-to-proved NAV with the gas names at a 75% premium versus 55% for the oilier names.”

One thing about your XOM 09 ests…i haven’t looked but XOM probably has quite a bit of its production locked up via hedges I’d be surprised if it was anything less than 75-80% 09 hedged and 50% ‘10 hedged. so i’d be skeptical that eps will show 50% variance.

(fyi...i posted this comment on your blog, too)

Plenty of Natural Gas: Exploration and Production Companies Keep Increasing Oversupply

excellent point about shut-in storage -- it should be considered inventory. the future supply problem b/c of lower rig counts is overblown. that's why curve flattening should be the next stage of this cycle.

just to expand on the EOG comment, stephen schork today:

"several Northeast pipelines started issuing operational flow orders (OFOs) in an apparent attempt to limit shippers exceeding their contractual limits...In addition to the Labor Day holiday, last week’s report also comprised the ratchet clause rollover. Injection ratchet clauses in the East require shippers to inject working gas through scheduled stages in order to preserve operational integrity. By September 01st no more than 80% of storage can be filled....According to the latest estimate from the EIA, maximum storage capacity in the East is 2.178 Tcf. As of two reports ago, week ended August 28th, estimated storage was 1.78 Tcf. That calculation was already 81½% of capacity or 1½ points above the ratchet. In other words, storage in the East over the last two reports was at operational capacity. Thus, the OFOs were a likely means to hold storage below the 80% threshold...What’s so bullish about that? Absolutely nothing."


here's the rest of schorks note: www.cnbc.com/id/327973...