Investing in The Oil Patch

If there is one topic on clients minds it does seem to be the price of oil and investing in oil related stocks. We are cautious here. It seems that the volatility in this space is only beginning. Shale producers are the swing producers in the oil complex at this juncture. As a group shale producers are more nimble than other players in the oil complex. If shale producers are the swing producers then we may be in for a period of volatile energy prices. Shale producers in the United States will be more apt to bring on production and cut production swiftly. Larger national producers like Saudi Arabia and Mexico are less nimble in their approach and the larger national operations have dominated this landscape for decades. If the shale producers are in fact the swing producers then oil prices may be less stable going forward. That is if the shale producers survive the latest oil glut.

As for oil prices right now, in my trading experience bounces like the one we have seen off of the $40 level are usually seen in bear markets. Very sharp and very severe while usually short in duration. I am bullish in the longer term for investing in the oil complex as I have been for most of my career. The oil majors are diversified across the energy complex as well as internationally. They are large companies with solid balance sheets and pay larger than average dividends. As a long term investor what’s not to like? Time will tell but I think it will behoove one to be patient investing further in the oil patch.

By way of Arthur Cashin comes a very interesting perspective on the latest oil volatility and drop in prices. His good friend Jim Brown of Option Investor has an interesting thesis on crude storage capacity. Here is what he had to say this week.

 Oil inventories are at 80 year highs and global storage is filling up fast. Once available storage is at capacity the impact to oil prices is going to be dramatic. Crude inventories in the U.S. have risen over 30 million barrels in the last four weeks to 413 million barrels. That is an 8% rise in inventories in just four weeks and this can’t continue forever. According to the EIA the U.S. has 373 million barrels of storage capacity in various tank farms plus 70 million barrels at the Cushing Oklahoma futures delivery hub. Refineries have another 148 million barrels of capacity.

 Inventories normally rise until early May so there may be some trouble ahead.

 The world’s largest oil trading company Vitol said they expect a “dramatic build in oil inventories over the next few months.” If oil builds as we expect we could see a dramatic drop in prices. Most oil analysts believe the +20% spike in crude over the last two weeks was short covering and a new move lower is ahead.

Once land storage and tanker storage nears capacity, oil prices could turn ultra-volatile. 

Negative interest rates seem to be all the rage amongst central banks. It is a race to the bottom for currencies.  Denmark, Sweden, Switzerland and the Euro Group all have negative interest rates.  In Denmark it is being reported that you can get a negative interest rate mortgage. The bank will pay you to take out a mortgage! No danger of a real estate bubble there.

The market broke out above the range the S&P 500 has been in since December. That put the bears and underinvested on the defensive forcing buyers into the market.  Negative news out of Europe on the Greek situation could knock bulls back but the range breakout has to be respected. Greece is down 4% overnight on rumors of No Deal. One little touched upon thesis for the equity markets here in the United States is that of a melt up. High equity valuations have major investors underinvested and expecting a pullback in pricing. A major run higher could be in store if the United States is perceived to be a safe haven with its strong currency and positive interest rates while the underinvested are forced to chase the market higher.  Investing is contingency planning. Consider all of the possibilities. May you live in interesting times.

I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd  Blankfein

To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .

A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill

Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.

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