Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
Continental Resources apparently took off all of its hedges.
A number of major oil co's are still noticeably off the October lows, but what have really done well off the lows are the MLPs. Also commodity exchanges (CME, ICE) have also done really well recently. ICE remains a long-term holding for me - it's financial infrastructure (which I also consider V/MA to be.)
I don't particularly want to add anything more oil-related, but I think there's values in energy if oil sits around these levels. The sector that's been really dropped would be the drillers - RIG, SDRL, etc. SDRL is interesting if you have significant risk tolerance, as if (emphasis on if) the dividend can manage to be sustainable, that's certainly very appealing at these levels.
If oil drops much lower, you're going to have major issues. Not only will production be halted, but will cause significant issues with heavily indebted oil co's.
"But suddenly it is not just the shale companies that are starting to look impaired. According to a Deutsche Bank analysis looking at what the "tipping point" for highly levered companies is in "oil price terms", things start to get really ugly should crude drop another $15 or so per barrell. Its conclusion: "we would expect to see 1/3rd of US energy Bs/CCCs to restructure, which would imply a 15% default rate for overall US HY energy, and a 2.5% contribution to the broad US HY default rate.... A shock of that magnitude could be sufficient to trigger a broader HY market default cycle, if materialized. "
"The U.S. drive for energy independence is backed by a surge in junk-rated borrowing that’s been as vital as the technological breakthroughs that enabled the drilling spree. While the high-yield debt market has doubled in size since the end of 2004, the amount issued by exploration and production companies has grown nine-fold, according to Barclays Plc. That’s what keeps the shale revolution going even as companies spend money faster than they make it.
“There’s a lot of Kool-Aid that’s being drunk now by investors,” Tim Gramatovich, who helps manage more than $800 million as chief investment officer of Santa Barbara, California-based Peritus Asset Management LLC. “People lose their discipline. They stop doing the math. They stop doing the accounting. They’re just dreaming the dream, and that’s what’s happening with the shale boom.”"
I don't know. Nobody does. Oil's up sharply today.
Gas at $2.70 seems very reasonable considering the mileage today's vehicles get. Knock-out the taxes and they're getting about $2 a gallon to: explore for it, drill for and recover it, refine it into useable fuel, store it, transport it and than market and sell it at the retail level. The tanker rigs on the road require huge quantities of deisel fuel to operate and also highly trained drivers. Imagine what insurance for one of those things must cost.
So, I believe petro should command a premium price over many other things consumers buy, including the gallon of drinking water we buy at the grocery store for a buck or more. While the cost of the crude at the well-head may dip further, I can't see the products we purchase getting much cheaper because of all the other costs involved in getting it from the well-head to the user. Since all those other costs will likely rise if inflation does, I don't think the energy sector is a bad place to be as part of a diversified portfolio for a longer-term oriented investor.
All commodities markets are notoriously volatile and subject to manipulation by producers and others. Gas wars have occurred in the past, albeit under different circumstances. Catch and some of the oldsters living in the Detroit metro region in the 70s will remember pump prices as low as 15-25 cents per gallon at times during those gas wars.
I'm not sure that gas at $2.70 is all that great from an historical perspective. It seems to still be noticeably above the long term inflation-adjusted prices. And then there is improved technology for finding deposits.
Infrastructure costs should be benefiting from modern economies of scale as well. (A reason the insurance rates you mention are so high is because the spills can be so big - but that just means that the ever larger supertankers are cost effective, even given insurance rates.)
Yikes - Trying to make sense of charts! It would be nice if the chart's preparer would state whether or not prices are inclusive or exclusive of state and federal taxes. The first, provided by a government agency likely shows the raw price without taxes - don't ya think? The second (linked one) by Gas Buddy appears to include taxes.
The red line in chart #1 demonstrates that prices are currently trending above average on an inflation adjusted scale. However, they are not markedly out of line with other peak periods (1918, 1938, 1984). It's interesting, too, that prices stayed relatively high during the decade marked by the Great Depression (roughly 1930-1940). "Inflation adjusted" charts like this are always problematic for me - as much depends on the particular "basket" of goods and products used to create the CPI. For sure, the government's benchmark for computing cost of living has varied over the years.
The real take-away from the price charts appears to be that gas prices, like other commodity prices, are highly volatile. A chart tracking gold or silver would make the fluctuations for gas seem small. I'd guess that if we linked a chart for corn, copper or lumber, year-to-year or decade-to-decade, the price fluctuations would be similar to what we see with gas.
A couple additional thoughts: (1) The argument about increased efficiencies and economics of scale are real. However, much of that is offset by the increased costs of environmental restrictions and higher costs of litigation/court settlements when accidents occur. (2) A commodity's price reflects not only the true cost of production, but also the desirability society attaches to that product. Do the inflation adjusted prices paid in 1900 or 1950 represent petroleum's true value today? ... Let's look back 50 or 100 years. "Family car" meant that everyone living under one roof shared the same vehicle. Multi-vehicle households were rare. Rickshaws were more common in China than cars. The DC-3 airliner (capacity 21 passengers) was still on the drawing boards (began service in 1936). And, Mr. Robinson hadn't yet uttered his famous: "Plastics."
Comments
A number of major oil co's are still noticeably off the October lows, but what have really done well off the lows are the MLPs. Also commodity exchanges (CME, ICE) have also done really well recently. ICE remains a long-term holding for me - it's financial infrastructure (which I also consider V/MA to be.)
I don't particularly want to add anything more oil-related, but I think there's values in energy if oil sits around these levels. The sector that's been really dropped would be the drillers - RIG, SDRL, etc. SDRL is interesting if you have significant risk tolerance, as if (emphasis on if) the dividend can manage to be sustainable, that's certainly very appealing at these levels.
If oil drops much lower, you're going to have major issues. Not only will production be halted, but will cause significant issues with heavily indebted oil co's.
"But suddenly it is not just the shale companies that are starting to look impaired. According to a Deutsche Bank analysis looking at what the "tipping point" for highly levered companies is in "oil price terms", things start to get really ugly should crude drop another $15 or so per barrell. Its conclusion: "we would expect to see 1/3rd of US energy Bs/CCCs to restructure, which would imply a 15% default rate for overall US HY energy, and a 2.5% contribution to the broad US HY default rate.... A shock of that magnitude could be sufficient to trigger a broader HY market default cycle, if materialized. "
http://www.zerohedge.com/news/2014-11-13/if-wti-drops-60-deutsche-expects-one-third-high-yield-energy-space-default
Keep in mind:
"The U.S. drive for energy independence is backed by a surge in junk-rated borrowing that’s been as vital as the technological breakthroughs that enabled the drilling spree. While the high-yield debt market has doubled in size since the end of 2004, the amount issued by exploration and production companies has grown nine-fold, according to Barclays Plc. That’s what keeps the shale revolution going even as companies spend money faster than they make it.
“There’s a lot of Kool-Aid that’s being drunk now by investors,” Tim Gramatovich, who helps manage more than $800 million as chief investment officer of Santa Barbara, California-based Peritus Asset Management LLC. “People lose their discipline. They stop doing the math. They stop doing the accounting. They’re just dreaming the dream, and that’s what’s happening with the shale boom.”"
http://www.bloomberg.com/news/2014-04-30/shale-drillers-feast-on-junk-debt-to-say-on-treadmill.html
Gas at $2.70 seems very reasonable considering the mileage today's vehicles get. Knock-out the taxes and they're getting about $2 a gallon to: explore for it, drill for and recover it, refine it into useable fuel, store it, transport it and than market and sell it at the retail level. The tanker rigs on the road require huge quantities of deisel fuel to operate and also highly trained drivers. Imagine what insurance for one of those things must cost.
So, I believe petro should command a premium price over many other things consumers buy, including the gallon of drinking water we buy at the grocery store for a buck or more. While the cost of the crude at the well-head may dip further, I can't see the products we purchase getting much cheaper because of all the other costs involved in getting it from the well-head to the user. Since all those other costs will likely rise if inflation does, I don't think the energy sector is a bad place to be as part of a diversified portfolio for a longer-term oriented investor.
All commodities markets are notoriously volatile and subject to manipulation by producers and others. Gas wars have occurred in the past, albeit under different circumstances. Catch and some of the oldsters living in the Detroit metro region in the 70s will remember pump prices as low as 15-25 cents per gallon at times during those gas wars.
Hope today's smoother & Thanks for the kind remark.
Infrastructure costs should be benefiting from modern economies of scale as well. (A reason the insurance rates you mention are so high is because the spills can be so big - but that just means that the ever larger supertankers are cost effective, even given insurance rates.)
Article that goes with the graph:
http://inflationdata.com/Inflation/Inflation_Rate/Gasoline_Inflation.asp
The red line in chart #1 demonstrates that prices are currently trending above average on an inflation adjusted scale. However, they are not markedly out of line with other peak periods (1918, 1938, 1984). It's interesting, too, that prices stayed relatively high during the decade marked by the Great Depression (roughly 1930-1940). "Inflation adjusted" charts like this are always problematic for me - as much depends on the particular "basket" of goods and products used to create the CPI. For sure, the government's benchmark for computing cost of living has varied over the years.
The real take-away from the price charts appears to be that gas prices, like other commodity prices, are highly volatile. A chart tracking gold or silver would make the fluctuations for gas seem small. I'd guess that if we linked a chart for corn, copper or lumber, year-to-year or decade-to-decade, the price fluctuations would be similar to what we see with gas.
A couple additional thoughts: (1) The argument about increased efficiencies and economics of scale are real. However, much of that is offset by the increased costs of environmental restrictions and higher costs of litigation/court settlements when accidents occur. (2) A commodity's price reflects not only the true cost of production, but also the desirability society attaches to that product. Do the inflation adjusted prices paid in 1900 or 1950 represent petroleum's true value today? ... Let's look back 50 or 100 years. "Family car" meant that everyone living under one roof shared the same vehicle. Multi-vehicle households were rare. Rickshaws were more common in China than cars. The DC-3 airliner (capacity 21 passengers) was still on the drawing boards (began service in 1936). And, Mr. Robinson hadn't yet uttered his famous: "Plastics."