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Dan Dicker

Dan Dicker

Dan Dicker is a 25 year veteran of the New York Mercantile Exchange where he traded crude oil, natural gas, unleaded gasoline and heating oil…

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Never Trust A Banker About Oil Prices

In recent weeks I’ve commented on the powerful bullish forces that have combined in oil and oil stocks and your need to increase your exposure to them. So, before going on to other topics, this has to be the start of any column until further notice, despite the weakness in stock indexes overall.

OPEC and particularly Saudi Arabia continue to drop not so quiet hints about the importance of higher oil prices – for the cartel and the upcoming IPO of Saudi Aramco. In case anyone might have forgotten about their one-shot chance to remake their entire economy and culture, another ‘leak’ of Saudi oil reserve numbers was served up in the past week – a positive one, of course.

Many of the analysts who previously were pessimistic about the rise in oil prices have been slowly and steadily raising their projections. That should neither encourage us or bother us, as bank analysts have a dismal record of correctly projecting prices much into the future. One should always trust a trader first; whose obligation is to his own investments and money and not to retaining the respect of the community or keeping the job. Always remember: An analyst’s first priority is not to be wrong, while a trader doesn’t care if he’s wrong or right, only if he’s got the right side of the trade and making money.

Similarly, the speculative trade from hedge funds continues to be almost uniformly long – a fact that used to bother me much more in the days when bank proprietary trade desks dominated the speculators. In those days, their own positions would often be in conflict with sales, and, Chinese wall or not – could make for some very sticky and fast reversals of positioning inside the banks. When most speculators were on one side of the market prior to 2013, it was a huge siren to get out of that trade before the avalanche of bank traders began to liquidate. I used to call this the ‘porthole effect’ – as in a group of folks on a boat that is sinking, yet only has one porthole available for exit. If everyone would be calm, the departure could be an orderly one, but you and I know it won’t be – panic is sure to ensue, and that one porthole is going to become quickly useless to everyone.

Related: Oil Prices Up As Iran Deal Hangs In The Balance

Nowadays however, the speculative markets are dominated by machines and specifically algorithmic momentum programs. They don’t care what prices are, merely making multiple thousands of calculations a second to determine the flow of trade – and running with it. With such an overflow of similar and emotionless activity, we need to expect both that uniformity will appear more often and to more extreme levels, and that the exit from such trades, when it comes, will be far less emotional and panic-driven. In short, I’m less worried about a ‘porthole effect’ than I used to be, should oil come off the rails a bit.

Oil quarterly reports continue to come in – and they have mirrored my recommendations for stocks for the most part. We’ve been committed to companies that have not outspent cash flow and have been delivering value to shareholders in one of three ways; with buybacks, dividends and debt reduction. Those that have increased production at all cost, whether major, mini-major or independent have been punished by shareholders (i.e. Exxon, Cimarex, Concho) and those that have kept to a disciplined path have been rewarded (Total, Anadarko, Hess).

Related: Is The Golden Era For Renewables Around The Corner?

Finally, one note of misstep – on refiners. I have only briefly mentioned refiners as a choice investment to use in the last several months when it seemed that E+P’s were lagging. So, using refiners as a ‘holding zone’ for capital was a useful way to keep capital active, but hardly took advantage of the amazing move that refiners have continued to have throughout the last two years. I have argued for refiners at other times but have abandoned them in the last 8 months and have missed a massive move. My bad. I had seen the advantages of cheap shale oil and expensive crack spreads as a temporary one, while refiners have done a tremendous job in leveraging these advantages in export as well – and their shares reflect it. (see the Holly-Frontier quarterly report, for example).

Having missed this opportunity, I won’t recommend them now, despite the likely opportunity drop in Marathon Petroleum (MPO) after their buy of Andeavor (Tesoro). If you had them or have them – congrats to you. If you haven’t had them, I cannot recommend buying them at this late date in the cycle – which means they probably will go higher yet.

By Dan Dicker for Oilprice.com

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  • Joe Rice on May 06 2018 said:
    Call me crazy, but is there any common sense reason for allowing bankers to be in oil at all... All they do is create a false demand that we have to pay for.. .. Considering the price oil dictates the stability of the economy, is it rational to let random bankers not even involved in the producing or refining of oil gamble up the price of oil like drunken sailors at a crab table and then make every one else pay for it at the pump and every thing else made of oil...... talk about trickle up economics.
  • Mamdouh G Salameh on May 07 2018 said:
    Whether one is a banker, a trader, an economist or a researcher, one is bound to miss the mark when forecasting oil prices. Most of the time they get it wrong. Forecasting oil prices and also getting it right are one of the most difficult problems in economics. Forecasters get it wrong either because of vested interests, political inclinations or sheer ignorance in interpreting the data available to them.

    When endeavouring to project oil prices, it is better to look at the trends in the market. While trends don’t provide you with exact price numbers, they at least show you where prices are heading.

    To forecast the trends correctly, one has to analyse the market fundamentals. When these fundamentals tell me that the global economy is projected to grow this year and next at 3.9% compared with 3.5% last year, that the global oil demand is projected to add an estimated 1.7-2.0 million barrels a day (mbd) to global demand compared with 1.5 mbd in 2017 and that the global oil market is virtually re-balanced now, I can see an upward trend in oil prices emerging.

    If last year’s fundamentals supported an oil price ranging from $55-$57 a barrel, this year’s trends by comparison could support oil prices ranging from $75-$80. I will definitely not be far off the mark.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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