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Pressure On Oil Supply Eases-WSJ

|Includes: Apache Corporation (APA), BP, XCO

It is very difficult to forecast the future outlook for oil prices. In relation to other forms of energy such as natural gas it is obscenely expensive. Supply isn't really constrained even with the difficulties in demand and production has been relatively solid. Hundreds of billions of dollars are being spent to develop new deepwater and shale projects across the globe. Conversely fiat currencies such as the U.S. dollar have proven to be horrendous stores of value with record deficits, so hard assets such as oil which is also so essential for everyday life, become that much more valuable. Geopolitical risks such as Iran seem to add $10-20 to the price of oil, and most importantly growth in China and other emerging nations has offset slowness in Europe in particular.

The vast majority of market participants seem to be bullish and while I'm not interested in being bearish the sector I am concerned and feel that a large margin of safety is required on any investment. Most of the large oil companies are spending the majority of their operating cash flow on CAPEX to produce and develop new sources of energy. If prices dip the economics of these projects could really imperil the balance sheets for some of these companies. At T&T Capital Management our favorite names in the energy sector are Apache (NYSE:APA) and British Petroleum (NYSE:BP). Assuming oil stays where it is both stocks are extremely cheap and if natural gas prices increase that would be gravy for the investment thesis. We also own some bonds in Exco Resources (NYSE:XCO).

Disclosure: I am long APA, BP, XCO.