I view oil through a 25-year career of daily engagement in the futures markets. It’s not the standard Wall Street view.
I can’t describe how all that experience comes together but I CAN show you a few of the commodity factors that I look at that others don’t - making you more capable in understanding the energy sector, no matter what part of it you’re interested in.
One of the less discussed but critical factors impacting the trajectory of oil prices are oil financial factors.
Oil is priced physically at many points on the globe – and each price point is different, just like the same house would be priced differently depending on where you were. But oil is also tied FINANCIALLY to the benchmark prices funneled through the exchanges that handle forwards and futures, and those prices are what really set the physical prices around the globe.
Take our current circumstance: Global oil production is up about 800mm barrels a day in 2012 and demand is up perhaps 200-250mm barrels less than that. That would imply an increasing surplus and why you’ve seen many oil analysts predict lower prices this year –BofA even suggested $50 a barrel as possible for 2013.
Here’s why I think it won’t happen.
Two things are feeding into the financial price point for Brent oil traded at the Intercontinental exchange (ICE) that make a deeply dropping price unlikely for the next several months. First, while the global supply/demand picture might look bearish, the fundamental picture in the North Sea, where Brent prices come from, is anything but. A continual depleting North Sea production profile continues to create constant supply squeezes every several months, helping to keep prices continually firm. In addition, the correlations between asset classes caused by financialization of oil (as I describe in detail in my book) puts upwards pressure on prices as the melt-up in the equity markets continues.
And the financial fact is, that no matter what’s happening through the rest of the physical oil markets worldwide, the shape of global pricing relies almost exclusively on how crude is being priced in the Brent marketplace.
This is one of the primary reasons I believe that energy (and particularly crude oil production) will continue to be a far better place to be invested in 2013 compared to 2012 and why I felt that solid production and volume growth would translate into incredible outperformance this year.
This has already played itself out positively in the case of Noble energy (NBL) for example, which I recommended in December at $97 – they crushed their quarterly report this morning with a $0.63 beat and record sales and cash flow.
That beat was attributable to Noble’s great execution, but that execution could only make a difference in the high margin crude oil environment we continue to see – An environment created by the financial effects on the price of oil.