Tag Archives: Oil

Still Floating – An Update on Oil Markets

Seven weeks ago, I wrote a post about the contango in oil markets. To summarize, the world was falling apart and there was nowhere to put all the extra supply of crude oil and refined crude products, causing oil to briefly trade negative and oil tanker rates to skyrocket. As a result, tanker companies presented an extremely attractive investment opportunity.

What We Got Wrong

The length and severity of the oil price contango. The price of oil has rebounded significantly since its collapse into negative territory in April, leading to a flattening of the crude oil forward curve and a reduction in the contango opportunity:

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OPEC Production Cuts are a Joke

OPEC countries are reliant on oil and the cash flows they receive by selling oil at any price.

There will be no agreement to curtail supply. Reality and the incentive to cheat will trump talk and fantasy every time. What’s even more hilarious is that this time around they are inviting non-OPEC producers to cut production. These guys are gold:

LINK: Who Exactly Will Cut?

The oil market seems to be catching on lately as Brent oil is off around 12% from its mid-October highs:


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They’ve Talked The Talk. Can They Walk The Walk?

The price of oil has surged recently on talks of production restrictions by OPEC and Russia:


At the Schroders conference in Lisbon in September, someone made a very interesting remark: “if the OPEC guys actually thought they could pull off production cuts, the price of Brent would be up through $60 on insider trading…” I had never quite thought of that ‘insider trading’ dynamic, but it makes sense:

1) An OPEC minister or a proxy calls his broker in London
2) Buys oil futures
3) Broker gets the hint, piggybacks on the trade.
4) This starts happening at a number of London brokers
5) Oil price gets driven up on evident insider trading

The price of oil has performed well, but not “OPEC is actually cutting supply” well.

Here’s a Bloomberg article about the most recent discussions between the illustrious parties involved:

Bloomberg: Oil production cut talks

What are the odds they actually keep to plan this time around?

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A Note From Chief Maverick

Here’s link to my mentor and uncle Mal Spooner’s most recent post. Mal has over thirty years experience managing investment portfolios, founded and ran an award winning mutual fund company and is now a professor to students that probably can’t believe their luck in landing a prof like him.

In this post, he cuts to the heart of the matter about equity valuations and oil prices. Having invested in and financed oil companies throughout his career, Mal possesses a fundamental understanding of the oil industry that goes far beyond the daily permutations of the price of oil. There is a massive difference between charting oil prices and having gone to visit countless drilling installations and understanding the realities of the oil business.

The same can be said for his analysis of equity markets. He focuses on the real implications of global dynamics on actual businesses and their ability to generate returns for their shareholders. In this post, he makes the simple, yet compelling argument that S&P 500 earnings are actually considerably undervalued given the current level of interest rates. Enjoy!

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Oil & Stocks: Time to Break Up

The corollary dynamic between oil prices and major stock indices is one of the more confounding trends in financial markets right now. This article sums this complicated relationship nicely.


To expand upon the theme of lower oil prices being a benefit to consumer, it is worth pointing out that two years ago, American consumers were paying $4 per gallon at the pump. Now they are paying $2 per gallon. Therefore, filling up the tank on an SUV has gone from $120 to $60. If you filled up your tank twice a month, that’s an extra $120 in your pocket every month. To borrow from one of the commentators in the article – that’s a lot of Starbucks! (Actually, my illustrious uncle Mal pointed out the gas price/Starbucks trade to me over a year ago. Great call Mal!) read more

Pessimism -vs- Optimism… And a Brief Comparison of Hysterical Oil Prophecies

When I began my career as an institutional equity trader in Canada fourteen years ago, commodity prices where just about to make one of the most fantastic runs in market history. China was rising – and it was hungry. Hungry for the copper that would be needed for millions of miles of power lines. Hungry for the uranium that would power their new power stations. Hungry for the nickel and iron that would create the stainless steel needed for millions of cars and household appliances. Most of all, China was hungry for the lifeblood of modern industry and economic growth: oil.

But there was a big problem on the horizon. According to an army of experts, global oil production had – with an extremely high degree of certainty – reached its peak, just as the dragon of Chinese industry had acquired an unquenchable thirst for oil. The implications were exciting, and frightening. They were exciting, because if you had oil you were bound to become unfathomably rich, and frightening, because if you did not, you would invariably become subservient to those that did.

It was on the back of this dual hypothesis of waning supply and exponential demand that the price of oil made a spectacular run from around $25/barrel in 2002 to almost $150/barrel in 2007.

Now let us take a look at the present day. The price of oil has fallen to around $30/barrel based on what analysts would have you believe is limitless global supply. Moreover, Chinese economic growth has supposedly reached its peak and is thus doomed to terminal decline, which would also derail global economic growth. Surely oil will fall further and a price $10/barrel is not out of the question…

And is one sense, these analysts are right: there is theoretically an inexhaustible supply of oil – just not at $30/barrel and surely not at $10/barrel. This is because it is not economical for the majority of energy companies to produce oil at the prevailing prices.

However, for the vast majority of the world that are not oil producers, lower oil and energy prices are a gift equivalent to a global tax break, and in effect this makes every business not related to oil cheaper to run. This is a good thing, because it encourages commercial activity, which leads to economic expansion.

So let us now compare some assumptions from 2007 to those that we are now hearing in 2016:

– Chinese economic growth will continue to grow at a elevated pace leading to an inexhaustible demand for oil
– Oil supply is in terminal decline

The economic implication is increasing constant demand + low supply = higher prices

But this did not happen…

– The pace of Chinese economic growth is in terminal decline
– Oil will stay in a constant state of oversupply

The economic implication is decreasing constant demand + high supply = lower prices

If markets were wrong in 2007, why should we be so sure that they are right at the current time, especially if they are using inverse, albeit similar logic?

There are those that argue that green energy changes the game and will ultimately reduce our current reliance on oil. They may well be right. However, they would have to concede that it would require a tremendous wave of capital investment in green energy infrastructure to significantly usurp the use of oil over the next 10 years. This would imply that capital would flow from traditional energy producers (hydrocarbons) to green energy generation. However in order to build green energy capacity, you would need to use existing sources of energy. And guess what? Lower systematic investment in oil production accompanied by a sustained period of demand for oil can only lead to… higher oil prices!

I am not calling the bottom on oil. Just trying to dampen some of the hysteria.

Why peak oil predictions haven’t come true

Why pessimists sound so smart read more