Hedging Energy Sector Oil Price Risk

Volatility in oil prices makes investing in the energy sector a risky proposition. The collapse in oil prices following the OPEC meeting in November 2014, at which Saudi Arabia announced its intent to flood the market to put American shale oil producers out-of-business, resulted in a rout in energy equities prices.

The Energy Select SPDR ETF (XLE) fell by 37 percent from November 26, 2014, to January 20, 2016. For many investors, the drop had become too large to sustain, and they closed their positions, locking-in a substantial loss.

XLE has recovered its loss, and as of July 27th, the price was nearly identical to its value on November 26th, 2014. But the recovery in oil prices, due to heightened geopolitical risks, also makes them vulnerable to another downward correction.

Citicorp, for example, issued a forecast proclaiming that “the bull argument is based on a faulty analysis,” and that oil prices “will fall back into a band between US$45 and US$65 in just over a year.”This raises the question of whether investing in the energy sector represents an attractive risk-reward opportunity. Continue reading "Hedging Energy Sector Oil Price Risk"

What OPEC Cut Is Priced-Into The Crude Oil Market?

Robert Boslego - INO.com Contributor - Energies


As all seasoned traders know, oil futures contracts reflect the market’s probability-weighted price expectations. In addition, I believe that the market provides a risk premium to the long side which underprices oil to some extent.

One important question now is how much of a potential OPEC/Non-OPEC cut is already priced into futures contracts? The answer determines the risk-reward to being long or short, depending on the outcome of the 171st OPEC Meeting on November 30th.

Before going further, there is no definitive financial theory or procedure of telling specifically. So I have to make some informed guesses based on possible outcomes and past market reactions. Continue reading "What OPEC Cut Is Priced-Into The Crude Oil Market?"

Myths About Oil And The Dollar

Robert Boslego - INO.com Contributor - Energies


Oil prices and the dollar have been highly negatively correlated during the oil price collapse. From June 2014 through September 2016, the correlation has been -95%.

In financial articles, it's a commonplace to read that oil prices fell because the dollar strengthened, or oil prices rose because the dollar weakened. This is largely a confusion of correlation with causality.

It is true that there is a linkage. A stronger dollar does render oil prices higher in foreign currencies, thereby adversely affecting demand, a negative factor for oil prices. Continue reading "Myths About Oil And The Dollar"

Fed At Odds With Markets Over Oil

Lior Alkalay - INO.com Contributor - Forex


At long last, the market finally got their long awaited Federal Reserve rate increase. Yesterday, the Fed hiked the Fed Funds rate by 25 basis points, from 0.25% to 0.5%. The Fed's famously watched "dot plot" revealed that most members expect at least four rate hikes in 2016. And investors? If interest rate swaps are any indication, then investors expect no more than two rate hikes next year.

So who is right then? The Fed? Or the market? Continue reading "Fed At Odds With Markets Over Oil"

Government Sells Low

Adam Feik - INO.com Contributor - Energies


What will oil prices be when the U.S. government begins selling tens of millions of barrels of oil from its Strategic Petroleum Reserve (SPR) in 2018?

The House passed a federal budget on Wednesday – which is reportedly on its way to likely Senate passage and Presidential signature – calling for the government to sell at least 58 million barrels of oil from the SPR over an 8-year period beginning in 2018. The SPR currently holds about 695 million barrels in 4 sites along the Gulf of Mexico coast. Per the budget bill, the U.S. may sell up to an additional $2 billion dollars’ worth of oil from the reserve to build new pipelines and otherwise modernize infrastructure. That program would represent an incremental 43.5 million barrels based on today’s prices, bringing the total number of barrels to be sold up to a possible 101.5 million. At today’s rates, that could add about $4.7 billion into the US Treasury.

Or… Continue reading "Government Sells Low"