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Vet67to82 (< 20)

US EIA crude report for 2/4/2009

Recs

131

February 03, 2009 – Comments (7) | RELATED TICKERS: DXO.DL.DL , USO , XOM

Although the financials are still turbulent, I believe the energy stocks will leads us up and out of the morass. 

  It was reported that OPEC adhered to 67% of it's planned cuts and crude has held above the $40 mark in recent weeks, buoyed partly by OPEC's pact to remove more than 4 million barrels per day of output since September to force world markets to draw down  bloated inventories. Also by the contango players, that have leased ships, and taken posession of 60 - 80 milliion bbls of crude that would certainly driven crude prices lower.     The risk due to falling demand, it's impossible to tell WHEN the cuts will catch up, likely causing OPEC to overreact wih downside cuts.  The reduction in global inventories will tell us that the cuts have caught up with demand,  rising crude prices will take the energy sector with them.  However, If OPEC has overdone the cuts then crude pricing will continue to rise possibly killing the global recovery that's being sought.   

  The problem, as I see it, OPEC having been burned, from $147 down to < $40/bbl , will be extremely reluctant to increase supply.  The shorts, stupidly appear to be ignoring the OPEC cuts, and the contango players,  focusing only on demand info, and expecting $25 crude, if forced to cover could drive crude, spike crude, back to $75 - $100/bbl.  Given the global meltdown, do we really need the meltdown prolonged by commodities speculative "players?"

   I define a speculative player as anyone who has no intention of EVER taking posession of the commodity he (or she) is speculating in. 

7 Comments – Post Your Own

#1) On February 03, 2009 at 7:25 PM, DemonDoug (90.90) wrote:

can you prove that there are a lot of shorts out there?  I'd like to see evidence before you call people out on that.

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#2) On February 03, 2009 at 7:26 PM, cubanstockpicker (20.16) wrote:

I wouldnt short oil, I am shorting the producers. I dont care what happens now forward, these guys have had 7 months straight of some of the lowest prices on oil since 2004. If it continued to the mid summer, this will not be good for BIG OIL.

I wonder what would happen as XOM starts making less per qoq and they cant support the divy plus their leverage whcih at 140.00 is less like leverage and more like economizing. Not so much in this market. I dont like the oil sands pk either, including any other company heavily invested in Oil sands

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#3) On February 03, 2009 at 8:43 PM, rd80 (98.59) wrote:

Keep in mind that all that oil stored on tankers and other storage facilities will effectively be new supply coming to market at some point.

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#4) On February 03, 2009 at 9:24 PM, Vet67to82 (< 20) wrote:

Let's see, their words, not mine, SHORT, DOUBLE short, ULTRAshort. I easily found 663 of all types of shorts:

   Stocks              ( 17 )

    Mutual Funds   ( 506 )

    ETFs:               ( 50 )

   Futures              ( 31 )

Now here are several crude ( and crude products) shorts:

   UltraShort Oil & Gas ProShares (DUG)

The investment seeks daily investment results, before fees and expenses, which correspond to twice the inverse of the daily performance of the Dow Jones U.S. Oil & Gas index. The fund normally invests 80% of assets in financial instruments with economic characteristics that should be inverse to those of the index. It may employ leveraged investment techniques in seeking its investment objective. The fund is nondiversified.

 Category: Bear Mrkt   Est Total Net Assets: 320.81 million

(2) PowerShares DB Crude Oil Short ETN (SZO)

     Category: Bear Mrkt   Est Total Net Assets  n/a

(3) Short Oil & Gas Proshares (DDG)

     Category: Bear Mrkt   Est Total Net Assets  n/a

(4)  UltraShort DJ-AIG Crude Oil ProShares (SCO)

Category: Bear Mrkt   Est Total Net Assets  n/a

(4) PowerShares DB Crude Oil Dble Short ETN  (DTO)

   The investment seeks to track the price and yield performance, before fees and expenses, 200% of the inverse daily performance of the Deutsche Bank Liquid Commodity index - Optimum Yield Oil Excess Return. The fund allows investors to take a short view on the performance of the index. The index is a rules-based index composed of futures contracts on light sweet crude oil (WTI) and is intended to reflect the performance of crude oil.  

  Note:  WTI- West Texas Intermediate is what is pipelined to and stored at  Cushing, OK

   Category: Bear Mrkt   Est Total Net Assets  n/a

(6)  ETFS COM SHORT CRUDE  (ESCOF.PK)

(7)  SHORT CRUDEOIL/ETFS  (SOIL.L)

(a)  SHORT GASOLINE/ETFS  (SGAS.L)

(b)  SHORT HEAT.OIL/ETFS  (SHEA.L)

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#5) On February 03, 2009 at 9:43 PM, Balcombie (< 20) wrote:

Balcombie:  My remarks inserted below: 

Although the financials are still turbulent, I believe the energy stocks will leads us up and out of the morass. 

Balcombie:  This is the first mistake.  Financials and energy are not separated in the current mess.  They are siamese twins.  Commodity prices are certainly important, but in a time of freely flowing credit many projects that are being pushed out would have continued.  CHK would not be living within its cash-flow if credit were not tight and expensive.

  It was reported that OPEC adhered to 67% of it's planned cuts and crude has held above the $40 mark in recent weeks, buoyed partly by OPEC's pact to remove more than 4 million barrels per day of output since September to force world markets to draw down  bloated inventories. Also by the contango players, that have leased ships, and taken posession of 60 - 80 milliion bbls of crude that would certainly driven crude prices lower.    

Balcombie:  You don't seem to understand what Contango means in this context.  The "contangos players" don't influence the price of oil by loading oil.  They take advantage of the arbitrage that is available because others believe that the market is well supplied with oil at present (it is) but that the price of oil will rise over time (it will).  This results in buying oil cheaper today and selling it for enough the next month to pay all costs and a nice profit.  It is shooting fish in a barrel.  Only rub:  you have to be able to take physical delivery of the oil in storage, and be able to release it to the market at some point in the future.  This requires money to find storage, pay for insurance, and release the oil.  It is for big boys, not small fry.  As one example, Morgan Stanley and Goldman Sachs play this game.

Second, those 80 million barrels are "in storage" if rolled over, and will be released to the market whenever the cost of carry can't be met.  There is really nothing potentially elevating to the price of crude oil in this instance.

 Third, OPEC's actions and motivations are well understood.  If it was so sure that their cuts would have a fairly rapid effect oil prices would be higher now.  The problem is that global demand for crude continues to be revised downward and inventories have yet to show signs of being drawn upon.  Plus, OPEC has a spotty record of compliance.  However, I agree with you that this time they seem serious.  Anything above 50% compliance is above the historical norm.

 Bearing all this in mind one could easily assert that $40 oil is as much a leap of faith as any other price you care to offer.

The risk due to falling demand, it's impossible to tell WHEN the cuts will catch up, likely causing OPEC to overreact with downside cuts. 

Balcombie:  based on history your point is well made.

The reduction in global inventories will tell us that the cuts have caught up with demand,  rising crude prices will take the energy sector with them.  However, If OPEC has overdone the cuts then crude pricing will continue to rise possibly killing the global recovery that's being sought.   

 Balcombie:  it isn't clear to me what your objective is here.  Are you trying to recite history, be prophetic, or lay the groundwork for investment?  If the latter is your goal you need to realize a few things.  First, many energy stocks are not that cheap. As one obvious example XOM and CVX have outperformed the broader market by a wide margin.  By my screens most of the stocks--even to the larger e&p's are currently pricing $50-60 oil in their valuations.  You and I are not the only people on earth that appear to believe oil will rise in price at some point in the future.  Second, if you wait until inventories confirm your conclusions, it will be too late to make any "easy" gains.  One must understand that in this instance, as long as demand is the story and not supply, other indicators must be employed.  Whatever you believe is the best indicator that althought present times still look grim there is a definable timeline to economic improvement; that will be your clue that greater demand for oil will follow.  But also realize that demand will not look the same as 2008.  The future is highly unlikely to be awash in easy credit as in the past.  Unemployment will take years to recover.   China will use this instance to stimulate more domestic consumption in their economy to move away from heavy dependence on exports.  I believe OPEC is aware of this and realizes a return to $100+ a barrel will not serve their purposes.  It will only stimulate more efforts to invest in alternatives to oil. 

 

  The problem, as I see it, OPEC having been burned, from $147 down to < $40/bbl , will be extremely reluctant to increase supply.  The shorts, stupidly appear to be ignoring the OPEC cuts, and the contango players,  focusing only on demand info, and expecting $25 crude, if forced to cover could drive crude, spike crude, back to $75 - $100/bbl.  Given the global meltdown, do we really need the meltdown prolonged by commodities speculative "players?"

I do not disagree with you about OPEC.  There are countries like Venezuela and Iran that need high barrel prices and will lobby for them when the time comes.  However, the description of contango players above is simply incorrect.  They are not holding oil expecting any particular price of oil, and certainly not $25/b.  They are making money off the roll trade.  They do not cover.  If the arbitrage remains they "roll" and hold on for another month.  If it does not they will sell their crude into the market immediately.  80 million barrels moving into the market as fast as it can absorb it will do nothing to spike crude to $75-100.  You seem confused as to how this works.

   I define a speculative player as anyone who has no intention of EVER taking posession of the commodity he (or she) is speculating in. 

Balcombie:  Producers hedge without taking physical possession since they already have the oil.   They want price certainty to protect cash flows from future production against investments made now.  If there was no one on the other side of the trade willing to bet that they are incorrect, there would be no liquidity, no market, and global oil as a business would look a lot more like coal:  traded bilaterally, murky, price discovery would be difficult.  That oil's recent run upward was based on "speculation" apart from other forces and was "bad" is sophomoric.  Are we to assume that there is no speculation now because the price of oil is low?  

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#6) On February 03, 2009 at 11:04 PM, binve (< 20) wrote:

Vet, another great post.

The problem, as I see it, OPEC having been burned, from $147 down to < $40/bbl , will be extremely reluctant to increase supply.  The shorts, stupidly appear to be ignoring the OPEC cuts, and the contango players,  focusing only on demand info, and expecting $25 crude, if forced to cover could drive crude, spike crude, back to $75 - $100/bbl

I agree, I think the stage is being set for rise in prices.

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#7) On February 04, 2009 at 11:41 AM, Vet67to82 (< 20) wrote:

Balcombie: 

   here's a video you may want to watch: 

  http://www.cnbc.com/id/15840232?video=1021291949

 Re: " This is the first mistake.  Financials and energy are not separated in the current mess.  They are siamese twins. " 

   Financials and Energy are not siamese twins.  No MFool member would think a bank teller was the same as a pipe fitter or that either one could do the other's job without substantial help ...  The property, plant, and equipment are NOT the same, the balance sheets are NOT the same ...   Huh?  HOW?

Re: " By my screens most of the stocks ... "   I tried to get my head around the flaws in your thinking.  I thought, maybe if I visited your page, I could get an understanding from observing your picks (none), reading your comments (none), reading your blogs (none).  so I'm only left with the comments above.  Help us out.  If you've run some screens ... make some picks, add some comments, write a blog or two ...  

  May I point out I endeavor to relay info, I do inject my point of view, my evaluation of the facts as I see them, backed up with facts, I also try to offer positive and constructive comments, suggestions and recommendations. I also try to avoid negativity as we are surrounded by it, and rarely does negativity come with anything constructive.  I also welcome constructive comments, suggestions, and recommendations.   MFool members can see my picks, right and wrong, date and time, and determine if I have a clue, or ulterior motive - such as making a bad recommendation 'cuz I bought stock XYZa with real money.      

Re: " Producers hedge ... "   Hedging and Speculation are two different strategies, two different animals - .  Hedgers wouldn't just be producers ... hedgers would also include refineries, and airlines as examples; both of whom will be taking possession of product for their own needs, the refiners need crude, the airlined need jet fuel, motor oils, and lubricants ... you are comparing apples and oranges when you compare hedging to speculation. 

 

  

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