What’s attempted in this quarterly review is to look over the individual energy markets, from both a cursory fundamental and financial outlook and try to understand where each of these markets have been and are likely to go. From there, we can attempt to deliver some very generalized ideas on where some value might lie, both in the energy markets themselves and in the underlying equities that rely upon them. We won’t attempt to make specific recommendations or deliver target prices in this paper, instead hoping that it will open the door to further investigation towards specific stocks and futures trade ideas.
The most short term view of global crude oil would lend one to believe that prices are far overstretched: European recession, US slow growth patterns and a shocking drop in Chinese GDP growth projections have combined to drop demand of crude oil, or at least slow the growth of oil demand globally, all while the production of new supplies of crude have continued to advance largely due to new technologies in oil sands, deep water drilling and oil shale. This is no more evident than in the US, where the West Texas Intermediate benchmark for crude price has maintained a near $20 a barrel discount to the European (and mostly global) Brent North Sea price for most of the last two years.
But financial markets have outguessed the fundamentals, investing in crude oil through indexes, ETF’s and dedicated hedge funds, and moving crude oil most recently up $20/barrel on the mere threat of a loss of 3 million Iranian barrels and the increasing desire for commodity exposure as stock markets have risen. What has happened in the futures market has been a change from what was a very deep contango profile through much of the financial crisis to a now small premium profile, where front months are more expensive than back months – not in keeping with the likely improvement in economies that one should expect. However, just because markets are presently fundamentally ‘wrong’ is no reason to sell crude oil futures and hope for the best. Oil won’t bend to a simple analysis so quickly, that’s for sure.
And besides the likely recovery that will continue both here in the US and overseas, there are more fundamental reasons to believe that oil is relatively underpriced the further back in the curve you go – As global oil supplies…