What Oil Price Band Do The Saudis Want?

Robert Boslego - INO.com Contributor - Energies

Back in December, I deduced that the Saudis had budgeted a little less than $53 for oil in 2017. Their budget was based on their belief that they didn't expect to see any U.S. shale oil production response in 2017. Saudi Energy Minister Khalid A. Al-Falih said it in answer to a question in the press conference after the OPEC/non-OPEC meeting (see video starting at 51:35). He backed-up his belief basing it on the time lag of when oil prices had peaked in 2014 and when production peaked in 2015.

After the deals went into effect on January 1st, oil prices remained above $50 per barrel. According to the EIA’s weekly production data, U.S. crude production rose by 318,000 b/d between the last week of December and the week ending March 3rd, just before Al-Fahil’s speech in Houston during on March 7th.

U.S. Crude Production

He said he is optimistic about the global oil market in the weeks and months ahead, but "I caution that my optimism should not tip investors into 'irrational exuberance' or wishful thinking that OPEC or the Kingdom will underwrite the investments of others at our own expense." Continue reading "What Oil Price Band Do The Saudis Want?"

Energy-Focused Master Limited Partnerships (MLPs) Require Risk Management

Robert Boslego - INO.com Contributor - Energies

Energy-focused master limited partnerships (MLPs) have provided investors good returns over time, much better than owning crude oil futures. For example, from January 200 through July 2016, the Alerian Total Return Index (PACF:AMZX), a leading gauge of energy MLPs, provided a return of 867%, far exceeded the return from crude futures of about 63%.

However, there is reasonably strong correlation between AMZX and crude futures prices. As a result, AMZX has suffered some large drawdowns. It maximum drop from peak-to-valley (P2V) was 58% over the period mentioned above. I use P2V as my primary risk measurement because it shows how large a loss one may experience in a buy-and-hold strategy.

I tested hedging AMZX by maintaining a short position in crude futures. The risk-minimizing hedge ratio for crude futures was -17% but it only reduced the maximum P2V to 50% (see Hedged return in graph below).

Chart of AMZX, Crude Futures and Hedged

I therefore applied the risk management process I developed to determine when to be invested in AMZX and when to go to cash. I provide the citations for the mathematical formulae and back-tested results for anyone interested in utilizing this process below. Continue reading "Energy-Focused Master Limited Partnerships (MLPs) Require Risk Management"

Is It Time to Take Profits on Oil Refining Stocks? (re-visited)

Adam Feik - INO.com Contributor - Energies

I wrote on February 24th about whether the time had come to take profits on oil refining stocks like Tesoro, Valero, and others. (My conclusion was to hold the stocks for the time being, but to keep a close eye on them).

Since then, oil refiners have continued rising (generally), as oil prices have showed continuing weakness – especially in the last 30 days. Crude oil, of course, is the key input for refiners, so refiners benefit when its raw materials prices are low. Nymex crude fell below $50/bbl Wednesday, having fallen from $61 on June 23, 2015, and from $107 on June 20, 2014 (data from eia.gov).

Here's an updated table showing performance of selected refiners through July 22:

On Thursday, July 23rd, oil and refining stocks both fell. But more often recently, it's been… Continue reading "Is It Time to Take Profits on Oil Refining Stocks? (re-visited)"