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How Saudi Arabia Will Manage the Oil Market in 2017

Robert Boslego - INO.com Contributor - Energies

OPEC agreed in Algeria to limit future oil production. This represents a major shift in the policy announced in November 2014 to compete for market share through lower prices.

The OPEC communique stated the group will retain output to a "target range of 32.5 to 33.0 million barrels per day" (mmbd). In the latest OPEC Monthly Oil Market Report (MOMR), OPEC reported that production average 33.4 mmbd in September. While that is not far above the target range, there are other problems looming on the horizon; several countries—Nigeria, Iran, Iraq, and Libya—all want to restore their output to levels they were at before their supplies were disrupted, and that could push OPEC’s output up to nearly 35 mmbd if they succeed.

Saudi Energy Minister Khalid Al-Falih reversed KSA’s position from last April when it would not freeze output without Iran’s agreement to do the same. Instead, he said, Iran, Nigeria and Libya would be allowed to produce "at maximum levels that make sense as part of any output limits which could be set as early as the next OPEC meeting in November."

My interpretation is that Saudi Arabia and the smaller Gulf producers are therefore going to have to absorb the cuts if they intend to achieve the target. [Read more...]

OPEC's Algiers Meeting

Robert Boslego - INO.com Contributor - Energies

If you are having trouble keeping up with all of the rhetoric in the oil market over the past two months, you are not alone. That’s the oil producers’ basic idea, create as much uncertainty as possible in a bid to scare traders from shorting oil, thereby preventing oil prices from cratering.

Lead-Up to Algiers

Oil prices bottomed in mid-February, following the slide that had begun in June 2014. The trigger was a meeting between energy ministers from Saudi Arabia and Russia, along with a couple of smaller OPEC Gulf producers. They could not agree to a production cut, so they came up with a “freeze” proposal, whereby producers would agree not to increase production further.

Although this would not take one barrel of production out of the market, it was enough to spook traders who had large short positions to cover (buy). Random statements by producers created price spikes, and the resulting “headline risk” cause short sellers to progressively cover more and more positions. The effect was a sizable price rise. [Read more...]

Refinery Acquisitions Reduce Saudi Risks, Increase U.S. Energy Security Risks

Robert Boslego - INO.com Contributor - Energies

A recent article noted that Saudi Arabia Is Buying Up America's Oil Assets. Saudi Aramco is buying U.S. refining and petrochemical assets as well as energy and technology companies through its Saudi Aramco Energy Ventures LLC fund.
Congress has recently received a Long-Term Strategic Review (LTSR) of the Strategic Petroleum Reserve. The SPR's mission is to protect the U.S. from severe petroleum interruptions. The LTSR was intended to identify the key challenges that could impact the ability of the SPR to accomplish its mission.

I submit that it ignores a key challenge, the foreign ownership of refineries and petrochemical plants, that could render the SPR crude supplies meaningless.

The existence of the SPR is a key factor determining oil prices because the market does not have to factor in large interruptions of crude supply into prices because it knows the government has the SPR and will use it. [Read more...]

Copper Waits If Oil Keeps Upside; China Is In Focus

Aibek Burabayev - INO.com Contributor - Metals

Chart 1. Crude Oil-Copper Correlation: Gap Widened

Crude Oil-Copper Correlation
Chart courtesy of tradingview.com

Another attempt by oil to close above the psychologically important $50 level (black dashed horizontal line) has failed. This was the third and a good try, and it was after a good correction in July, which makes bulls nervous as they lose their patience. Copper couldn’t keep the correlation gains achieved in July as it didn’t follow the rising crude last month and on the contrary, it moved the opposite way below the $2.2 level. The gap between them widened.

It’s not all bad news. There are at least two positive factors: [Read more...]

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. [Read more...]

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