Monday, December 7, 2015

Thoughts on OPEC and Energy

Post Number 11 - Thoughts on OPEC and Energy

So OPEC has met and couldn't do anything to goose the crude market. Here's my take on the situation:

- Most commentators got this right. It is unrealistic to think that the Saudis and their Gulf allies will give on output without getting something in return. Since it is highly unlikely that the other OPEC members will cut output, this "something" has to be political. It will be tied up with the battles raging in the mideast. When it looks like there may be progress on those, we can start thinking about a firming of oil prices.

- US shale may be declining, but US deepwater Gulf of Mexico is increasing. Gulf production may even be profitable at prices near here. Remember, a big part of the cost of producing in the Gulf is buying the acreage rights from the government. This is done in an auction. At lower oil prices, there will be lower bids and thus lower costs.

- The big story to my mind is LNG. There is an ocean of LNG capacity being built in Australia, the mideast, Russia, the US and soon the Mediterranean. I do expect that this will find markets. Many nations want to use more NG to reduce pollution, both the global warming and the smog types. Nonetheless, world prices will come down hard. Remember that the cost of producing NG is extremely low, especially where the only alternative is flaring. Liquefaction and transport do cost money, but much less than current prices. This will also eliminate a manufacturing advantage that the US has. As if US manufacturing doesn't have enough problems....

So how to play this? You could short nearby crude and roll every month to pick up the carry. I know that sounds like picking up pennies in front of a steamroller. But with a small position, it does make some sense. I would not short US natural gas. The nearbys are vulnerable to a turn in the weather. The more distant positions do have room to fall, but I don't see a catalyst at this time. Better to wait for a rally in the spring.

A trade that may be interesting is long Travelcenters of America (TA). This is a gasoline and diesel marketing company. The thesis is that low fuel prices will lead to continued volume growth. It is trading at a PE of about 6. I don't have it, and don't want to do the work. If any you out their have researched it, give me an email.

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