Author Topic: Future strategy to survive discovering 1 out of every 20 bbls of oil we now use.  (Read 183600 times)

Spekulatius

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LNG is a fungible good, so if China buys from another source, it will drive up prices and the US LNG will flow somewhere else, The issue could be that some infrastructure needed or export (liquefaction , terminals ) does not get build if there are no LT contract ins palace that guarantee a profit for the operator.
To be a realist, one has to believe in miracles.


SharperDingaan

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Ianian anti-ship missiles are now actively being fired in the Strait of Hormuz ... 
yet there's still no risk premium on oil?

https://ca.reuters.com/article/topNews/idCAKBN1KV2FG-OCATP
" The official, however, did not suggest that such a missile test was unusual during naval exercises or that it was carried out unsafely, noting it occurred in what could be described as Iranian territorial waters in the Strait. “It’s pretty clear to us that they were trying to use that exercise to send a message to us that as we approach this period of the sanctions here, that they had some capabilities,” Votel told reporters at the Pentagon."

And the US is now being called out directly on its lying, bullying, and mobster mentality ....
and this is the 'diplomatic' channel.

https://ca.reuters.com/article/topNews/idCAKBN1KW04E-OCATP
“About the recent offer by Trump, our official position has been announced both by the president (Rouhani) and myself. The Americans lack honesty,” Zarif was quoted as saying by Tasnim. Asked whether a message from the United States was to be delivered to Iran by Omani officials, Zarif said: “There is no such message,” Tasnim reported.

https://ca.reuters.com/article/topNews/idCAKBN1KW036-OCATP
"China said this week it would put an additional 25 percent tariffs on $16 billion worth of U.S. imports in retaliation against levies on Chinese goods imposed by the United States. A separate piece in the People’s Daily quoted vice agriculture minister Han Jun saying that if a trade war broke out, many other countries were willing and “completely able to replace American agricultural products’ share of the Chinese market.”

“People of insight are soberly aware that so-called ‘America first’ is actually naked self-interest, a bullying that takes advantage of its own strength, challenges the multilateral unilaterally, and uses might to challenge the rules,” it read. Earlier this week, Chinese state media accused the United States of a “mobster mentality” as it moved to implement additional tariffs on Chinese goods. Beijing had all the necessary means to fight back, the reports said."

The US starts a mob war, against the entire world, yet oil (& strategic commodity prices) don't reflect the rising risk? Bullshit.
And how are 'war-time' mob 'bosses' traditionally 'retired' ??

All someone need do is start a run on the US Strategic Reserve, US agriculture, and US exports.
Play the volatility, & put lots of very unhappy people on the streets just in time for US mid-term elections....

SD




nkp007

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What's been happening with oil has been really interesting. 6+ weeks of oil declines right in the middle of summer driving season?

Wonder if OPEC overproduced in anticipation of Iran sanctions rather than waiting for sanctions to pull oil off the market.

jmp8822

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What's been happening with oil has been really interesting. 6+ weeks of oil declines right in the middle of summer driving season?

Wonder if OPEC overproduced in anticipation of Iran sanctions rather than waiting for sanctions to pull oil off the market.

China recently stopped reporting inventories.  It is hard to know if they are building inventory or draining inventory.  Considering the softness, they might be draining inventory, attempting to hide it by avoiding inventory level reporting, to not spook the market. The political versus market-based factors are intriguing in the oil market right now.  It's not a secret that Trump prefers low oil/gasoline prices heading into the elections in November.  If you were China, not exactly thrilled with Trump and the trade conflicts, perhaps you might attempt to drain inventory for 3 months, by lowering implied worldwide demand via lower oil prices, then goosing back all the barrels before elections in November, driving oil prices way up so no one could ignore it? Trump would be livid, and perhaps China would enjoy the carnage.  Just a theory - there are certainly big players involved with many differing incentives.

sculpin

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FPA Capital Fund energy commentary...

https://fpa.com/docs/default-source/funds/fpa-capital-fund/literature/quarterly-commentaries/fcap-q2-letter_final.pdf?sfvrsn=4

More on Our Energy-Related Investments

Despite an improving oil price environment, many investors are still shunning the energy sector, which
represented just 6% of the S&P 500 Index at the end of the second quarter. Our energy equities as a whole
(and the entire sector, for that matter) are still widely disconnected from what the underlying spot and 24-
month futures prices would imply. For instance, our portfolio has just one Energy and Exploration (E&P)
company whose share price reflects an oil price of $55 per barrel or more (NBL).

We believe that there are two subjects of intense debate that have recently kept a lid on energy equity
prices.

First, even though inventory levels have fallen back below long-run averages, there is widespread concern
that OPEC7 and Russia will turn on the taps again and send spot and forward oil prices much lower. Here,
we would once again point out that higher oil prices have dramatically boosted the national incomes of both
countries. Assuming they have the requisite spare capacity (and it isn't clear that they do), why would they
flood the market and shoot themselves in the foot?

At the same time, the world needs more oil to avoid a disruptive price spike. Back in April of 2017,
Organization for Economic Cooperation and Development (OECD) crude inventories were around 3.05
billion barrels, and since then, that figure has been draining at an average rate of around 600,000 barrels
per day. That has put worldwide inventories below normal, which would imply a $70-$80 a barrel Brent
price based on historical data. OPEC, Russia, and other partner countries originally committed to take 1.8
million barrels per day off the market in November 2016, but output has fallen further than that. According
to May figures, oil production declines totaled 128% of the original pledge (162% from OPEC nations and
54% from other countries).8

This above-and-beyond performance was not a result of the cartel's generosity but rather from involuntary
declines. While we see material reductions in other relevant producing countries, the elephant in the room
is Venezuela, which has involuntarily cut nearly as many barrels as Saudi Arabia, and yet its oil production
continues to decrease at a very concerning rate. At the same time, the Trump administration's decision to
pull out of the Iran nuclear deal could conservatively take 200,000 barrels a day off the market (or potentially
multiples of this depending on how the sanctions are implemented).9 Meanwhile, global crude consumption
continues to surge, with the typically conservative International Energy Agency expecting demand growth
of another 1.4 million b/d in 2018.10

If you look at the math conservatively, we find that OPEC must increase production to offset these sources
of supply disruption, moderate climbing oil prices, and avoid a damaging price spike. Interestingly, we
believe the amended agreement from the June 23 OPEC meeting was designed to help the cartel control
an increasingly precarious deficit so they don't dramatically overshoot what we believe (based on consistent
OPEC commentary) is an inventory target that's still roughly 100-150 million barrels below where we stand
today. So, to recap, if you're Saudi Arabia or Russia (the world's top two suppliers of crude) and you're
aiming to achieve the goals discussed above, it becomes very risky to hold back production on the belief
that U.S. shale alone can offset a growing deficit.

This then leads to the second major concern and topic of debate, which revolves around the recent
amplification of logistical constraints in the Permian basin; namely, the ability to get gas and crude to market
in the face of short term pipeline limitations and limited alternative takeaway capacity (trucking, railway,
etc.).

This development was the primary reason for share price volatility for companies heavily exposed to the
basin during the quarter. Before diving into the specific weakness in our Permian-weighted holdings, it is
important to note that this is a temporary issue due to the timing of new pipelines coming online through
2019, and that regional price differentials

tombgrt

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Worries are at least partly justified atm. EM weakness adds to the fears of slowing demand growth and market has shown ability to at least in the short term supply market enough. Hard to tell how much of additional supply is from destocking and playing games so you have to wonder how one can make a decent short term analysis. I'm not smart enough to do that and I doubt anyone is.

tombgrt

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Another lesson: don't diversify on lesser ideas. Was basically saying GXE was the far better deal here and yet I managed to shift some profits in the dogs. Stupid!

PPR now only 1/8th of my GXE position because of price action in last few months but still sucks. Same for IPO and ZAR (which are even smaller positions). When is market going to shift sentiment around on these? Volume so low it only takes one buyer to set the price. ATU at least did well.




Or a better lesson: Don't get f*cking cocky!

sculpin

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Market View
Ninepoint Energy Fund Market View
August 14 2018
 
Explaining the Unexplainable

An uncomfortably high level of volatility has unfortunately become a part of investing in the energy sector in recent years. Energy more than other sectors seems to be subjected to worries/sell offs surrounding trade wars, emerging market wobbles (Turkey), and supply increases (OPEC, US). In bear markets the market ignores unalterable truths like pending Iranian export reductions, continued strong demand growth, 2019-2023+ production declines in a collective ~ 50% of oil producing countries, and a pending pipeline shortage out of the epicenter of US oil shale growth (the Permian Basin).

Today is a great example of the disconnect between oil fundamentals and oil equities. Oil fell $0.28/bbl on the day due to I believe Turkish headlines over the weekend (we struggled to find anything else to account for the move that saw oil fall as much as $1.67 at the 1pm lows). So oil was down 0.5% and multiple stocks (and holdings) fell 4%-5%. Stocks barely moved up with oil rallying 15% YTD in CAD$ terms and yet fall by 4%-5% when oil falls 0.5%. August volumes are not helping as it literally feels like there are only a handful of energy market participants (including us!) active in looking for opportunities. The past month has been especially brutal with holdings like MEG Energy falling by 30% (largest investor quits the Board and people wrongly assume that he is going to be liquidating his position…actually turns out that he is going activist but who cares?), Wildhorse Development falling by 18% (they may need to truck small volumes that adds $2/bbl to their expenses which worst case reduces NAV by 5%), and Athabasca Oil falling by 18% (no update on midstream monetization in their Q2 reporting…market too impatient to wait another 1 month). With negative momentum quant selling has not helped either.

The oil market right now is suffering from:

A mismatch in timing between OPEC+Russia production increase (up about 800,000Bbl/d over the past 3 months) versus the pending reduction in Iranian oil exports due to US sanctions (700,000-1,700,000Bbl/d potential range).
 
Worries about demand destruction due to trade wars (thanks Trump) and emerging market weakness (ie. Turkey) even though outside of weather related impacts there is zero evidence of this occurring
We believe that oil remains in a bull market. The most important aspect to this is continued declines in oil inventories and the exhaustion of OPEC spare capacity. As Kuwait, Qatar, Saudi Arabia, the UAE, and Russia have increased production levels over the past several months this has resulted in OPEC+Russia spare capacity falling from ~ 1.5MM Bbl/d to our estimated 0.4MM Bbl/d. This is the lowest level in modern history.

image: http://www.ninepoint.com/media/615937/efmv1.png?width=219&height=307


Source: Ninepoint Partners

image: http://www.ninepoint.com/media/615938/efmv2.png?width=491&height=299


Source: Ninepoint Partners

image: http://www.ninepoint.com/media/615939/efmv3.png?width=744&height=390



Source: Ninepoint Partners

image: http://www.ninepoint.com/media/615940/efmv4.png?width=558&height=346


Source: IEA, Ninepoint Partners

At the same time, Venezuela continues to implode (fell 70,000bbl/d last month, and 7 of the past 9 months), missiles fly from Yemen/Iran into Saudi Arabia on a continuous basis, and the US Permian Basin is about to hit the wall with respect to pipeline capacity (to be fixed ~ end of 2019). In short, as demand continues to grow and OPEC has exhausted its spare capacity and Iran is about to involuntarily take 0.7-1.7MM Bbl/d off the market and US production growth is constrained for the next year the oil market will soon become incredibly tight. We believe that this will support higher prices with oil likely to trade ~ $100/bbl at some point in 2019.

Given that energy equities are trading at less than half of their historical multiples at current oil pricing (~3.6X EV/CF, >15% free cash flow yields) we continue to see highly attractive upside. As the equity market largely ignores this, at least we have seen both an increase in corporate buybacks (TCW buying back > 10% of their shares outstanding) as well as hostile takeovers and shareholder activism (ESI & TDG / MEG). With the largest disconnect in history between oil stocks and the price of oil, we calculate that our Fund has a comically high potential upside of 51%/97%/141%/183% at $70/$80/$90/$100 oil. Note that just for the stocks to trade at a still discount to historical multiples AT THE CURRENT OIL PRICE we see over 50% upside.

In our next full monthly report due out in early September we will be updating our inventory forecasts as well as going into detail about why the exhaustion of OPEC spare capacity is highly significant and will become the topic du jour in 2019. For now, we would reiterate that once we get through this timing mismatch (OPEC production increase relative to Iran sanctions biting) we see oil inventory trends continuing to support higher prices.

You are not alone in your frustration.
Reach out with any questions / concerns.

Eric Nuttall
Senior Portfolio Manager
Ninepoint Energy Fund / Ninepoint Energy Opportunities Trust

SharperDingaan

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It's useful to seperate oil-price from the marginal 'quant' and 'value' funds.
Quant funds are by-and-large 'momentum' funds trading volatility. While oil prices offer material potential volatility, it is not actually delivering it and there's no trend to the story line. Hence both Quant and Value funds are forced to sell down, and a 0.5% fall in oil-price becomes a 3-4% fall in share price.

The quants need more volatility.
The value funds are essentially 'shorting' through sales today at a higher price and repurchases tomorrow at a lower price. Short positions that aren't visible because they are selling down from existing holdings ;)

SD

Joe689

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So in your opinion, when does this vicious cycle end?  We need a spike in oil?  Feel like that already happened when we got above wti 70... what will it take 80?