New Mantra - "It's the Cap Ex Spending - Stupid'' !
Per the Oil & Gas Journal Article discussed earlier; Crude Oil Traders now control the price of Oil - that is beyond dispute. However, beyond that point is the fact that never in recent times has the potential for extreme ''volatility'' ever been higher. Due to the dramatic shift in ''short'' vs. long contracts in Crude Oil - the degree of sheer ''speculation'' built into todays Crude Prices is not realized by most people here imho. We are at $18 Oil, NOT because crude traders believe so strongly in the present underlying fundamentals, but because of the profitability to technical trading here. In their own commentary - the fundamentals support a $14-16 trading range.
This is also why we are seeing people like Yamanni ''talking down'' Crude Prices. They realize that the single worst scenario possible is for OPEC to have reached its price goal in Crude prices before the first barrel of Oil has been cut ! - Think about that - is their any greater supporting arguement for ''speculation'' supporting crude prices here ? Is there any scenario any worse in supporting ''cheating'' that to give them what they ultimately wanted right up front before they endured any cuts, any pain ? Certainly not a -''no pain - no gain'' situation here; all OPEC had to do was sign the agreement and Crude Oil Traders immediately took crude to where OPEC wanted it ! simply an amazing fact that has been lost in the euphoria here...
The sobering fundamentals - even when tempered with OPEC's very likely strong initial compliance was just months ago; only thought to be capable of producing & sustaining $15 Crude Oil. In all of the reports that I read concerning projected cuts, supply level drawdowns etc. - these numbers were thought to be potentially capable of producing a trading range in Crude OIl of $14-16. We have NOT exceeded the fundamental numbers that were projected by these very same Crude Oil Traders as far as supply drawdowns and other statistical measures of supply & demand. In fact, only the price itself is exceeding their earlier projections. They are riding a technical trading move - soley to put money in THEIR pockets; that's their job - we should not expect anything less - but, conversely we should NOT be shocked by the International Oil Majors doubting the ''sustainability'' of prices here and not putting THEIR money where the ''Traders'' mouths are...
We potentially also have a ''known'' situation by Industry Insiders (Oil Majors) who imo, ''know'' that the price of Crude has been artificially moved a bit high by sheer trading speculation. Just as they knew that the fundamentals did not support $8, or $10 Oil, they are saying that we've come to far - too fast; and that ''present'' conditions do not support $18 Oil Cap Ex spending !
Given that the ''EASY" money has all ready been made in the Oilpatch Stocks; it may be time to be cautiously optimistic and a bit quick on the profit taking trigger here. I am paying more attention to what the people are saying who control the Cap Ex spending here, than I am to Crude Prices.
Crude Prices got us to OSX 70-77; but to move substantially higher - we need the folks who put those Cap Ex $'s to work to take us higher. There has been a shift here from a Crude Price fueled market, to a Cap Ex spending one. 80% of stocks here presently are near fair value imho. We have numerous companies who have NO POSSIBILITY within 12-15 -18 months of possibly increasing earnings to anything near 97-98 levels and are selling at PE's of 30-40 here on forward earnings expectations ! We are no longer able to throw darts at single digit PE stocks and make money here. The EASY money is over ! PE's of 30 & 40 are not value stocks any longer.
The contrarian arguement is that $10 Oil virtually guarantees $20+ Oil, or that the very probable recovery in Asian demand and OPEC cuts is extremely Bullish. No arguement there; LONGTERM we are no where near where we will ultimately find ourselves; that could be OSX 120-140 ultimately. This is entirely a ''time'' factor arguement. - Too much - to soon is my entire position here. Also do not misunderstand the cold, stark reality that only the International Oil Majors & Independants get to give us the ''answer'' - as their opinion, or answer to that question is the ONLY one that matters. Untill they are convinced of the ''sustainability'' of Crude prices - it does NOT matter what we, or anyone else thinks. Remember, we are trading/investing in Oilpatch Stocks here - not Crude Futures Contracts themselves; this simplistic fact seems to be lost on occassion here...
To determine where the OSX stocks are going - look not nearly as much to Crude Prices as to the Intnl Oil Majors view of Crude Prices.
That point had better not be lost on anyone desiring to make money during the next 12 months in the Oilpatch...
We really are at an inflection point where profit taking has never made so much sense on a risk vs. reward basis. We have a tremendous dichotomy between the Crude Oil Traders extreme position in trading Crude Futures and the extreme - show me first/sustainability attitude of the Oil Majors. One side is running the Price of crude up potentially well above it's ''fair value'' fundamentals; and lets not forget the reason why - profits. They are merely Crude Oil Traders are they not ? By sheer definition - they will let Crude run to $75 if supported by ''technical trading'' - short covering etc - but, how niave would we be, to expect the Intnl Oil Majors to increase Cap Ex spending based on this ''technical trading imbalance'' which adds an extreme volatility to Crude Prices.
In knowing ''why'' Crude Oil is priced where it is presently; one can definitely understand the ''sustainability'' issue from the Oil Majors.
Untill both the Crude Oil Traders and the International Oil Majors & Independants are on the same page and going in the same direction expectations-wise on Crude Prices; it will remain a take profits on the ''major run ups'' market with continued volatility.
...how likely is it that when they get the OPEC compliance news May 10th that many Traders run for the doors to lock in profits ? Remember, there is virtually no one left to ''cover shorts'' - they're gone !
For the Crude Traders to take us higher; given their own fundamental expectations of supply and demand; it will take near perfect compliance by OPEC and some additional positive US supply drawdown and/or , positive Asian demand news. Imho, if we receive merely news as expected - we sell off, if we recieve bad news - we sell off hard; and again, we need all most miraculous good news to move higher short term imho. 2 out of the 3 possible scenarios here lead to a selloff and the odds of scenario #3 occurring - given recent numbers is not likely right here. - Sure, Asia will ultimately surprise - the underlying longterm fundamentals for a continued rise of Crude above $18 and $20 is very plausible. But, this is entirely a ''too much - too soon'' arguement, with the emphasis on the ''too soon'' half of the equation...
Many here are wanting to look just on the surface of Crude Prices alone and are potentially missing the underlying more important fact of ''who & what'' is driving and supporting (read sustaining) Crude Oil prices. As important as ''who & why'' - is knowing the degree of sheer speculation going on. If one does not realize that their is an EXTREME level of Bullish speculation in Crude Oil presently - one is totally unprepared for a ''potential'' dramatically volatile correction in Crude prices. If crude prices return to $15-$16 what will the OSX stocks do here ? Given the incredible overnight shift here and the 50% one month run, do you think all of these Institutions are just going to stand by and not lock in their gains ? The mad rush for the door will exceed anything we have ever seen - potentially, if OPEC disappoints on May 10th, or if Oil Traders decide to merely ''lock in'' their speculative trading profits. - folks, I don't like those odds nearterm. While I expect OPEC to comply initially, and no one is more bullish longterm on the Oilpatch than me; I think we need a cold dose of reality here - and profit taking is that reality...
Also imho, a nearterm trading opportunity/plan exists whereby - being wrong in taking profits too soon is virtually, entirely eliminated. By taking OSX profits and rotating into undervalued small & micro-cap E&P's - one will receive an even greater short term fundamental return in these stocks, than in the OSX; if indeed crude spikes to over $20.
While no trading strategy exists that can eliminate entirely the downside to either OSX, or E&P's here if crude retraces; one does exist whereby one can lock in the OSX profits and position oneself to accelerate that return if Crude continues to move up. The OSX's upside to increased Oil prices is now somewhat muted by the Intnl Oil Majors stand on NOT increasing Cap Ex spending - the E&P's neither rely upon, nor wait on anyone ! - They put it on the bottomline immediately . This is a virtual no-brainer imho in the short term.
Once the market takes the E&P's (and I'm primarially referrring to small/micro caps) higher; then the rotation opportunity back into the OSX stocks still presents itself - ''when'' (not ''if'') the Oil Majors finally unleash Cap Ex spending in the Oilpatch.
If I am wrong on the nearterm positive potential of crude prices; I can accelerate my nearterm returns by rotating those OSX profits into E&P companies. If crude spikes to $20 and the Oil majors still do not increase Cap Ex spending overnight (they will do nothing ''overnight'') the E&P's nearterm fundamentals and their shareprice movement imho, will dramatically outpace the OSX stocks in the short term off of this type of continued move in Oil Prices. While no strategy other than being in cash, can entirely eliminate the downside if crude retraces; I know I sleep much more comfortably holding CRK vs. CAM and PGEI vs. SII ... however; another major point in my personal trading play fwiw - is that I will not hesitate on taking profits-selling anything, or everything on any major disappointment in crudeprices ! No way on earth do I chase a major retracement not after having the profits in my pocket. I step aside, let a bottom fall into place, gather support and then I re-pick my ''ponies'' again at that time, given the ''then'' fundamentals...
Never has being ''potentially''wrong in taking profits - been potentially, so right !
Once again; my thoughts are primarially ''Trading'' oriented. I am not criticizing anyone who desires to buy & hold.That has nothing to do with my thinking here. My point is that this incredible volatility and the now 5th potential 50% cylclical trading range in 8 months is virtually a once in a lifetime, if not at least - a once in a decade opportunity for those who do choose to ''trade'' and for those who get it right ! I view each of these ''runs'' as a separate ''year'' of trading. Traditionally, one would only get a 50% range in which to trade over a years timeframe. In the last 8 months I have had now 5 opportunities to get a solid chunk of that 50% move. I literally have had the opportunity to receive the benefit of 5 years of normal trading profits in 8 months. Untill this volatility abates; I am approaching each ''run'' as a new ''year'' of opportunity. Volatility, if understood and if played right is the Traders greatest friend. This is virtually a market anomaly having now 5 opportunities of this degree of profit potential in this compacted timeframe; never has ''trading'' made so much sense imho.
The ''conservative'' players can ''scalp'' rather easilly the numerous 15-25-30% ''sections'' out of these 50% sectorwide moves of late. The aggressive trader may potentially obtain an even larger piece of the pie and/or take advantage of the incredible individual stock trading opportunities as well... I have to stick with what's working now, as I am definitely from the ''don't fix it - if it isn't broke'' school of thinking !
Good Luck |
