March Is A Good Month for Energy

Saturday, February 20th, 2010

By Frank Holmes
CEO and Chief Investment Officer

We are entering a time of year that in recent decades has been good for energy prices and energy equities.

Combine that with new estimates that domestic and global energy demand will rise in 2010, and we have the makings of a promising period for investors.

March tends to be one of the best months of the year for both crude oil and natural gas.

As you can see on the charts below, which cover roughly the past 20 years, the price of oil at the end of March is on average nearly 4 percent higher than the closing price in February. For natural gas, the increase is even more eye-catching – gas on average climbs more than 7 percent in March.

The main reason for the oil price rise in March relates to the demand pull created by
refiners ramping up in advance of the summer driving season. Crude price increases fall off through the early summer before picking up again in the late summer. From September to October, there is typically a big price drop that continues through year-end.

For the refiners, March marks the end of a five-month stretch in which monthly crack spreads (value of refined products minus the price of the crude oil feedstock) tends to increase. If next month follows the pattern, spreads would be 4 percent wider than February. So far in 2010, however, the results have lagged the longer term trend – January saw spreads narrow by about 3.5 percent and for February to date, spreads are up about 2 percent.

For natural gas, which is always extremely volatile, March is a strong month in large part due to late winter snowstorms that move across the country. When you couple that weather variable with the fact that inventory levels for natural gas have usually been drawn down substantially during the winter heating season, the result can be some dramatic spikes for gas.

A cold January lifted spot natural gas prices about 6 percent higher than the December forecast, and in early February gas for April delivery was on average trading 16 percent higher than the same period in 2009.

For energy equities, the typical rally period is February through May. So far, 2010 is not straying too far from that long-term trend: from a peak of 1,122 in early January, the Amex Oil Index (XOI) fell 12 percent by February 9 before heading back up 5 percent over the next six trading sessions.

Of course, seasonality is not a perfect barometer because each year brings its own distinct market conditions. In 2010, the extent of global economic recovery will be a factor, as will economic growth rates in the large emerging nations.

In the U.S., petroleum consumption fell by 820,000 barrels per day (4 percent) last year. Federal officials predict daily oil demand will increase about 1 percent this year, while natural gas demand is expected to increase nearly a half-percent. Gasoline prices may top $3 per gallon this spring, according to the federal outlook.

In its latest monthly report, the International Energy Agency raised its forecast for global oil demand growth to about 1.6 million barrels per day this year, with all of that incremental demand coming from the emerging markets.

China accounts for a quarter of the new global demand for oil. That incremental growth could be revised upward again if it looks like global GDP growth – led by the large emerging economies – will be stronger than the anticipated 4 percent. And if the supply response to additional demand is weak, higher oil prices could result.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The AMEX Oil Index (XOI) is a price weighted index designed to measure the performance of the oil industry through changes in the prices of a cross section of widely-held corporations involved in the exploration, production, and development of petroleum.

Tags: Chief Investment Officer, China, Crude Oil, Crude Price, Emerging Markets, energy, Energy Prices, Feedstock, Frank Holmes, Global Energy Demand, Inventory Levels, Months Of The Year, Natural Gas Prices, oil, Oil Price Rise, Price Increases, Price Of Oil, Refined Products, Refiners, Spikes, Term Trend, Time Of Year, Winter Heating, Year End
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Sovereign Risk and the Price of Oil

Monday, February 8th, 2010

European and U.S. stock markets have taken a hit recently as spooked investors from Shanghai to Sao Paolo were fleeing risky assets amid concern that the financial crisis in Portugal and Greece could spread through the euro zone with vast implications for the fate of the fragile global economic recovery. (Fig. 1)

Liquidate & Buy Dollar

A steep drop in crude-oil prices triggered declines across the commodities spectrum, as investors nervous about the pace of the economic recovery gravitated back to the dollar. Crude oil tumbled to a seven-week low of $71.19 a barrel last Friday, down 14% since the 2010 high of $83.18 reached on Jan. 6.

Investors’ fled for safety drove the U.S. dollar near a nine-month high against the euro. Emerging market currencies also weakened in Asia, while U.S. stocks fell a fourth straight week, the longest streak since July.

A Shift of Sovereign Risk

According to EPFR Global, risk aversion has prompted a withdrawal of $1.6 billion from emerging market equity funds during the week ending Feb. 3, the biggest outflows in 24 weeks, and $516 million has left Asian equities outside of Japan.

The charts from CDR (Credit Derivatives Research) tell the story of this investors’ perception. According to CDR, there has been a dramatic shift of risk in developed nations relative to emerging and less-developed nations when comparing three sovereign risk indexes, SovV, EM and CEEMEA. (Fig. 2)

In SovX, the GIPSI (H/T Zero Hedge) - Greece, Italy, Portugal, Spain and Ireland, represent around 65% of the index risk. In EM, Venezuela accounts for 26%, Turkey, Brazil, and Argentina represents 12% respectively of the EM risk. In CEEMEA, Turkey and Russia represent 49% of the index risk (followed by Hungary and Ukraine each at over 8%).

In addition, CDR finds that the sovereign risks of the emerging economies appear to be closely tied to the price of oil:

“It would appear that the CEEMEA and EM sovereign risk indices are threatened more by commodity price pressures than credit risk currently - and given the ‘relatively’ high price of oil/gas, their risk remains less of a concern than developed nations where the Ponzi appears to be in question.”  (Fig. 3)

Oil Price - A Key Risk Factor

Emerging market countries, such as Brazil, China or India, are evolving since the early 90s. During this period, the issuance of bonds by these countries has increased significantly reflecting their needs for substantial long term and infrastructure investment.

Among the many determinants of risk bonds, the price of oil is a key factor as it plays a significant role in economic growth, inflation, production costs, trade balances and currency. Nine of the 10 economic recessions in the United States since the end of World War II were preceded by a dramatic increase in the price of oil.

A Sensitivity Issue

Oil prices nowadays are extremely volatile, and sharp fluctuations in oil prices contribute to macroeconomic volatility all over the globe. The impact of this volatility on economy varies according to a country’s relative dependence on oil production and exports.

For oil-exporting countries like Russia and Saudi Arabia, a rise in oil prices caused a perception of risk reduction relative to its obligations. Conversely, an oil-importing country sees its risk index increase due to a barrel price shock.

Financial Crisis 2.0?

Last week’s wild commodity price swings underscore how investors aren’t totally convinced that the world economy is on an upward trajectory. Investors are worried that multi-governments’ debt problems will spread globally similar to the subprime crisis in 2008.

In addition to concerns about GIPSI sovereign debt defaults in the 16-nation euro zone, the U.S. is grappling with its own deficits and the high jobless rate, while China began restricting lending last month to prevent high inflation.

Some analysts expect global commodity prices would eventually firm up reflecting economic recovery albeit high volatility; and fundamentals should increasingly dominate expectations and drive prices.

But there are others see the current “correction” as caused by factors very similar those brought on the “financial crisis of 2007-2010” and warned this could signal “a new crisis in development.”

Seeking Negative Beta

In this environment, a defensive play would be to invest or allocate a portion in regions that are less prone to the price of oil, which is a significant sovereign risk factor. Sector wise, agriculture and alternative investment vehicles in real estate or land development should provide some good diversification to any long term portfolios.

Jeff Rubin, Chief Economist at CIBC World Markets pointed out that the United States is less sensitive to oil price volatilities because it is itself an oil producer (5 million barrels out of 19 million barrels the US consumes are produced in the US), so it receives some of the benefit of both higher and lower oil prices. An IEA analysis also indicated that the U.S. should be less affected by oil price shocks than Japan, OECD and Euro zone. (Fig. 4)

This competitive edge probably partly explains how investors still see the U.S. dollar as a safe haven, and Mr. Geithner’s optimism that more debt won’t hurt U.S. credit rating, in spite of the fiscal and economic challenges quite similar to what the Euro Zone is facing.

BRIC minus R

In addition to the United State, GDP growth in Brazil, China and India could get boost from the softening and stabilizing of oil prices and should increase their competitiveness. Brazil and Chindia are all oil producers with aggressive state-sponsored exploration and production efforts and strong economic growth prospect. Brazil, with a new and improved investment grade credit rating, is now largely self-sufficient and has insulated its economy from oil price shock on net basis.

The economic impact of oil prices on oil-importing, developing countries such as China and India could be more pronounced primarily because Chindia are more energy-intensive due to its strong growth rate, and less energy efficient. From that perspective, Chindia, though good prospects could be more of a roller-coaster ride for investors.

Among the emerging economies, lower crude oil prices will be a big dampener for Russian economy. Russia’s two oil wealth funds declined by a total $1.54 billion over the last month, as more funds were transferred to aid federal budget shortfalls. The Reserve Fund, one of Russia’s two oil wealth funds, is expected to run out by the end of 2010.

Hat Tip: Professor Pinch

Tags: Asian Equities, BRIC, China, Commodities, Credit Derivatives, Crude Oil Prices, Derivatives Research, Developed Nations, Dramatic Shift, Emerging Economies, Emerging Markets, Equity Funds, Euro Zone, Gipsi, Global Risk, Greece Italy, India, Market Equity, oil, Portugal Spain, Price Of Oil, Risk Aversion, Risky Assets, Sovereign Risk, Sovereign Risks, Steep Drop
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Holiday Season Good for Oil Stocks

Sunday, December 20th, 2009

December 18, 2009

By Brian Hicks and Evan Smith
Co-Managers, Global Resources Fund (PSPFX)

If 2010 follows the pattern of the past 15 years, we are approaching the start of a seasonal climb in the price of crude oil that could present a good investment opportunity in energy-related stocks.

Oil is down from its 2009 peak of $81 per barrel seen in October, but we remain constructive on energy stocks given the improving economy and positive seasonal factors heading into the new year.

As the 15-year chart above illustrates, much of the recent drop in the price of oil lately can be explained by commodity price weakness that typically occurs from October through December, and thus does not represent a cyclical downturn.

These seasonal factors include a reduction in driving during the fall and more moderate temperatures between the summer cooling and winter heating seasons. During the 15-year period, January has typically been the month in which the seasonal oil price trend starts back up again as markets prepare for the summer driving season.

It is interesting to note that, while crude oil prices are usually soft during this time of year, energy stocks begin to strengthen in December, offering nimble investors an opportunity to capitalize on favorable seasonal strength to come.

The chart below shows month-over-month performance trends for the S&P 500 Energy Index over the past 20 years through November 2009.

On average, these large energy stocks have gained 2 percent in December over the past two decades. After a dip in January, the index has charged forward with average month-over-month gains exceeding 2 percent in three of the next four months before a seasonal falloff beginning in June.

The line graph shows the frequency of positive returns in each month. Twelve of the past 20 Decembers (60 percent) have seen positive returns for the S&P Energy Index—in April and May, positive returns have occurred in 15 of the past 20 years, or 75 percent of the measures.

We believe supply and demand fundamentals for energy will tighten as the economic recovery takes hold next year, and that energy stocks will benefit.

Earlier this month the International Energy Agency raised its 2010 forecast for global oil demand, largely as a result of accelerating economic growth in China. OPEC is also expecting oil demand to increase.

It’s a different story on the supply side—the energy team at PIRA sees net global oil output actually declining in 2010, which would tighten spare capacity to less than 1.8 million barrels per day, roughly half of current levels, and likely exert an upward pressure on prices.

Tags: Brian Hicks, China, Commodities, Commodity Price, Crude Oil Prices, Decembers, Emerging Markets, Energy Index, energy stocks, Evan Smith, Global Resources, Line Graph, Mdash, Moderate Temperatures, oil, oil stocks, Performance Trends, Price Of Crude Oil, Price Of Oil, Price Trend, Pspfx, Resources Fund, Seasonal Factors, Smith Co, Winter Heating
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Baltic Dry Index Up 7 Straight Days Bullish Sign

Wednesday, January 28th, 2009

The Baltic Dry Index, the indicator of global shipping activity is now sitting at 1014, having hit its low of 663 December 5, 2008. This is a valuable measure of global trade activity, and it is indicating a resumption of trade. It is still a long way off its all-time high of 11,793 of last spring, down 91.4% from the top, but up over 50% off its bottom.

We’ll keep watching this. This is bullish for both finished exports and commodities. Its still early, and this is a promising sign. The loss experienced in the index includes the value differential owing to the crash in commodity prices experienced during the last 6 months. The BDI Index fell off a cliff in September which coincided with the collapse of Lehman Brothers, which happened to be a large underwriter of trade related financing. With other banks unwilling to take Lehman’s place, trade fell into the crater left behind.

Global trade credit froze along with the credit market as it became very difficult, if not impossible to trade, with banks unwilling to issue letters of credit.

This is a sign that the trade finance market is thawing and that shipping can resume. A continuation of this trend should be considered bullish, particularly for China exports, global trade, and for commodities producing companies and countries.

The Baltic Dry Index does not measure the price of oil, although it does include the price of fuel as a component of the shipping cost.

Chart: Bespoke Investment Group

Tags: Baltic Dry Index, Banks, Bdi, Bdi Index, China Exports, Collapse, Commodities, Commodity Index, Commodity Prices, Commodity Producers, Crash, Differential, Failure, Finance Market, Global Shipping, Global Trade, Investment Group, Last Spring, Lehman Brothers, Letters Of Credit, Price Of Oil, Promising Sign, Resumption, Shipping Activity, Shipping Cost, Straight Days, Trade Finance, Underwriter
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Hendry: What to Buy if You’re Bearish on Oil?

Friday, January 16th, 2009

Hugh Hendry, CIO, Eclectica Asset Management, discusses oil with Geoff Cutmore of CNBC. We are big fans of Hendry’s outspoken views, and this is a must-view. Click the image below to watch the segment:

Here is what he said:

It is phenomenally difficult to be bullish on oil owing to the fact the oil curve is in contango. What I mean is that while oil is trading today at $40, if you go out two years, its expected, indeed it trades at $70, and that’s why you have all the surplus oil being hoarded on these vessels at sea.

Now, every day that the oil price doesn’t move closer to $70, is a day of negative carry, its a day where you’re losing money being long oil, which is why I proffer my caution.

I’m a believer in Peak Oil, I’m a believer in this capital destruction we’re not going to be investing or looking for oil in all the hideous places like Russia etc. over the next ten years, and we need to. The world of ten years time the time of our grandchildren needs us to be looking for the blasted stuff now.

We ain’t going to do it, we’ve suspended all that activity. I agree [that there is an opportunity there], but as in all walks of life, it is going to be a matter of timing, and I believe the [Carl Weinberg, see video] timing is way way off.

It’s an enormously difficult task to be bullish on oil today.

Lord John Brown was the most bearish person in the world about oil, and for twenty years the price of oil lost 80% of it value, and the most bearish guy in the world ended up at the top, when the price of oil reached its lowest levels.

BP stock in absolute price terms went down during the ten years the price of oil was going from $10 to $150 per barrel, so if you’re bearish on oil you should own BP; you should own Shell, because they’re contra-cyclical, they’re unleveraged, you get a very high carry. In a market like this one, you want to own assets like this that are unleveraged, and you get a 5% yield.

Tags: Absolute, Ascii, Assets, Believer, Bp, Cambria, Caution, Cnbc, Curve, Div, Eclectica Asset Management, Font Definitions, Font Format, Footer, Grandchildren, Hendry, Hugh Hendry, Money, Mso, Oil Price, Orphan, Outspoken Views, Panose, Paper Source, Peak Oil, Pitch, Price Doesn, Price Of Oil, Props, Russia, Sans Serif, Segment, Shell, Stock, Stock Price, Stock Terms, Style Definitions, Style Name, Style Type, Surplus Oil, Theme Font, Times New Roman, Twenty Years, Video Timing, Walks Of Life, Weinberg
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Energy Storage in Short Supply

Thursday, January 8th, 2009

Last Summer, we were reminded over and over how we were running out of oil. Now we find ourselves in the awkward situation of running out of places to store the stuff. Its pretty clear that the price of oil is no longer subject to the decisions of the oil producing countries to cut production. They are now in the unusual position of being powerless, pushing on strings like central bankers.

Over the last several years, demand for paper oil (naked oil futures) was far greater than for the physical stuff, and now that the paper world has been unravelled, and the paper money (leverage) that supported it is being retired, the one problem at least for now has been that there have been a great deal more sellers of the paper oil than buyers.

At the end of 2008, the IEA reported that current inventories of crude oil, gasoline and distillate fuels were well above their long term averages. Running out of storage for oil is great for the tank and tanker business, but a bearish development for oil, despite the recent run-up.

Shipping prices collapsed as trade slowed last year, but they are now rising sharply as traders at the likes of Citigroup and BP fill tankers and moor them off Scotland. Thursday, daily charter rates for tankers shipping crude from the Middle East to the U.S. jumped 45%, according to London’s Baltic Exchange.

If you really don’t want to get your hands dirty, you could just buy tanker futures. Despite the latest jump, they are roughly a third of where they were six months ago and will probably continue rising as surplus oil looks for a home.

Did we really go that rapidly from running out of oil to running out of places to stockpile it?

Tags: Awkward Situation, Baltic Exchange, Bp, Charter Rates, Citigroup, Crude Oil, Current, Decisions, Distillate Fuels, Eia, Energy Storage, Futures, Gasoline, Iea, Inventories, Last Several Years, Leverage, oil, Oil Futures, Oil Producing Countries, Paper Money, Price Of Oil, Running, Shipping Prices, Surplus Oil, Tank, Tankers, Term Averages
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Byron Wien: Ten Surprises for 2009

Tuesday, January 6th, 2009

Byron R. Wien, Chief Investment Strategist of Pequot Capital Management, Inc., today issued his list of Ten Surprises for 2009. Mr. Wien has issued his economic, financial market and political surprises annually since 1986. The 2009 list follows:

1. The Standard and Poor’s 500 rises to 1200. In anticipation of a second-half recovery in the U.S. economy, the market improves from a base of investor despondency and hedge fund and mutual fund withdrawals. The mantra changes from “fortunes have been lost” to “fortunes can still be made.” Higher quality corporate bonds, leveraged loans and mortgages lead the way.

2. Gold rises to $1,200 per ounce. Heavy buying by Middle Eastern investors and a worldwide disenchantment with paper currencies drive the price of precious metals higher. In a time of uncertainty, investors want something they can count on as real.

3. The price of oil returns to $80 per barrel. Production disappointments and rising Asian demand create an unfavorable supply/demand balance. Other commodities also rise, some doubling from their 2008 lows. Natural gas goes to $9 per mcf.

4. Low Treasury interest rates coupled with huge borrowing by the Treasury send the dollar into a serious downward slide. Overseas investors become concerned that the currency printing presses will never stop. The yen goes to 75 and the euro to 1.65.

5. The ten-year U.S. Treasury yield climbs to 4%. Later in the year, as the economy shows signs of recovery, economists and investors shift their mood from concern about deflation to worries about inflation. A weak dollar, rapid growth in money supply and record-setting deficits (over $1 trillion) are behind the change.

6. China’s growth exceeds 7% and its stock market revives. World leaders credit China’s authoritarian government for its thoughtful stimulus policies and effective execution during a challenging period. The Chinese consumer begins to spend more and save less and this shift is behind the unexpected strength in the economy.

7. Falling tax revenues from the financial sector cause New York State to threaten bankruptcy and other states and municipalities follow. The Federal government is forced to step in and provide substantial assistance. The New York Post screams “When will the bailouts stop?”

8. Housing starts reach bottom ahead of schedule in the fall, and house prices stabilize after dropping 15% from year-end 2008 levels. The Obama stimulus program proves effective and a slow growth recovery begins before year-end. Third and fourth quarter real gross domestic product numbers are positive.

9. The savings rate in the United States fails to improve beyond 3%, as most economists expect. The concept of thrift seems to have vanished from American culture. Peak job insecurity and negative growth drive increased savings early in the year, but spending resumes as the economic growth turns positive in the second half, making Christmas 2009 the best ever.

10. Citing concerns about Iraq’s fragile democratically elected government and the danger of a Taliban-controlled Afghanistan, Barack Obama slows his plan for troop withdrawal in the former and meaningfully increases U.S. military presence in the latter. In a hawkish speech he states that the threat of terrorism forces the United States to maintain a strong military force in this strategic area.

Mr. Wien believes these surprises, which the consensus would assign only a one-in-three chance of happening, have at least a 50% probability of occurring at some point during the year. In previous years, more than half of the elements of the list have proven correct.

Pequot Capital Management is a private investment firm.

Source: Business Wire
http://www.businesswire.com/portal/site/home/permalink/?ndmViewId=news_view&newsId=20090105005763&newsLang=en

Tags: Authoritarian Government, Capital Management Inc, Chief Investment Strategist, Chinese Consumer, Corporate Bonds, Demand Balance, Despondency, Disenchantment, Downward Slide, Leveraged Loans, Overseas Investors, Paper Currencies, Pequot Capital Management, Pequot Capital Management Inc, precious metals, Price Of Oil, Printing Presses, U S Treasury, Unexpected Strength, Weak Dollar
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Oil Breaks $35: Commodities Snapshot

Friday, December 19th, 2008

It wasn’t that long ago, June 19, 2008, we had a conversation with Stephen Briese, author of the Committments of Traders Bible about the imminent bursting of the oil and commodities bubble (200 Days of Oil Supply Held Long by Speculators). That was just weeks before the price of oil (and other commodities) peaked at 147. In that conversation, Briese made the firm statement that oil could drop as low as $30, which is why we are bringing it back to your attention. It was very very hard to believe that it could come true, but here we are. Here is that conversation again:

To Listen, Press Play

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,
9 min. 18 sec.

Oil is trading around $34.71 down $1.51 from yesterday’s close, as of the writing of this article.

Here we display Bespoke Investment Groups handy commodities at a glance roundup. They do an excellent job of creating graphs like these that make it relatively easy to see where prices are in relation to their 50-day moving averages. The green shading represents two standard deviations above and below the commodity’s 50-day moving average, and moves above this shading are considered overbought or oversold.

Gold, Silver have recently broken out from their oversold positions very nicely into overbought territory. In the food segment, Corn and Wheat have also had a break out off their oversold bottoms and nearing overbought territory. The rest however have continued to see weakness.

Tags: Bottoms, Briese, Committments, Commodities, Commodity, Creating Graphs, Gold Silver, Investment Groups, Moving Average, Moving Averages, Oil Supply, Press Play, Price Of Oil, Roundup, Segment, Shading, Snapshot, Speculators, Standard Deviations, Wheat
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