A few quick blog-type posts today to give an overview of the energy picture and how it should be traded in the coming week:
1 - The word from Vienna on Thursday morning from OPEC was an expected zero: There will be no output changes from the member states, nor an appointment of a new Secretary, whose nationality might give us some insight into the cartel’s organizational direction over the next few years. Will he be an ally of Saudi Arabia, willing to change outputs to match demands and price? Or will he be an ally of Iran, needing to pump the maximum no matter the economics in order to fund a shaky economy? For now, the ‘status quo’ in output would indicate a bearish price move, as shale oil from the US has impacted total global supply while demand is still only slowly recovering; now at only 88mb/d. I have believed and continue to believe that oil is NOT A SALE here: while the fundamentals would indicate a drop, there is still the correlation with rising stock indexes and the financial balloons I wrote so much about in my book, “Oil’s Endless Bid”. I do not see prices going below $87 in the near-term, with upside potential still.
2 – Some corporate notes: BP has abandoned development of their enormous $10B Mad Dog oil field in the Gulf of Mexico, at least for now. There’s a simple case here about the money necessary to develop versus the output and price of the underlying crude. I was excited about BP and recommended them based much upon the further development of Mad Dog – and need to reassess the stock now. I cannot question the decision by BP, but it goes to prove that deep water assets are fickle and can throw up capex requirements that make them, at least temporarily, uneconomic.
3 – In the same vein, Petrobras (PBR) announced that one of their major offshore finds in the LARA field is showing poor flow rates and will need further fracking technologies to release the massive projected reserve there. I’ve never been a fan of Petrobras, mostly because I feel the government interest is too large, but also because their capital expenditures to develop the Frade and other offshore assets has been incompetently handled (including the unnecessary building of their own multi-billion dollar deep water rigs). But, the LARA field also shows how tough a nut off-shore Brazil is to crack – it is deep and technically challenging. FYI- Chevron (CVX) is deeply engaged in the Frade as well.
4 – Marathon (MRO) has abandoned its sale of Canadian Sands assets, which they were planning on using in a huge stock buyback plan. Marathon has been a sector leader since spinning off its downstream assets (into Marathon petroleum (MPC)). I don’t know whether the bids for their Athabasca assets were weak because of the Keystone XL pipeline issue or because Western Canadian Sour (WCS) crude futures prices have been so weak. But I do think Marathon has done a bit too well, a bit too fast. This might slow their parabolic rise for a bit.