Trading Oil Futures – Sorting the Strong from the Weak

oil line 220

Today’s Weekend Daily Reckoning explores whether the strategy of trading oil futures and stocks based on events in the Middle East still has merit in a world awash with American crude. Aussie shale stocks might be wondering the same thing.

In case you missed it, Brent crude fell into a bear market this week. It’s dipped 21% from its peak of US$115.06 on June 15, falling to US$90.57 in Wednesday trade. The West Texas benchmark is already below US$90.

So much for the ‘fear’ premium from Middle East unrest. But then again, psychology changes alongside the market. And if you look at the stats on American production, it’s not hard to see why. US domestic oil production is up roughly 70% over the past six years. The Yanks are now pumping 8.7 million barrels a day, according to the New York Times. This has cut US imports from OPEC in half.

One of the ironies of this boom is that many American refineries aren’t equipped to deal with light, sweet shale oil. They were built to process heavier crudes from Mexico, Venezuela and Canada. And they’re not the only thing that needs to catch up to the new realities. A lot of US energy policy is left over from the years when America feared an energy crisis from lack of supply.

Of course, there are a lot of oil producing countries who do not want to see the oil price stay below US$100 for anything like a reasonable period of time. Anything below that price usually takes their government budget down with it. It’s the same reason WA Premier Colin Barnett is bleeding over the iron ore price. But there’s nothing like a bit of a market shakedown to separate the strong hands from the weak.

It’s not a bad way to think about the market right now. When markets are falling, it’s always fruitful to keep an eye on those stocks that fall the least, or — better still — those that can rise against the trend.

Taking the energy sector broadly, the index isn’t showing much life, as you can see below.

Source: STEX

For my money, there are probably better opportunities elsewhere. But there’s always the exception.

One of those this week was one of Tim Dohrmann’s small cap stocks. It’s an oil explorer operating in East Africa and is up something like 150% in eight weeks. Tim’s subscribers have had some fantastic opportunities put in front of them this year.

The company in question has farmed in some energy majors to develop what looks to be incredibly promising acreage. That’s even more impressive if you consider the majors are becoming very thrifty indeed where they spend money in the current climate.

What that means for Aussie-based shale plays is the open question right now. If you’re a long time reader of the DR, you’ll know former editor Dan Denning made some very profitable trades off this sector of the energy industry. But I wonder what he’d make of ConocoPhillips’ decision, revealed this week, to discontinue its involvement in onshore shale exploration in Australia. The company’s early results were disappointing.

ConocoPhillips was in a joint venture with New Standard Energy [ASX: NSE] and operating in the Canning Basin. Angela Macdonald Smith, writing in the Australian Financial Review, puts the main problem like this: ‘It is the remoteness and lack of infrastructure that make the possibility of any returns a dim and distant prospect, even if the wells had turned up trumps and everything else was sorted out.

That’s one advantage American shale has had all along. A lot of the infrastructure and expertise from the conventional oil industry was accessible straight away. The one area in Australia where there is something like this kind of legacy is the Cooper Basin in South Australia.

Two names operating there are Drillsearch Energy [ASX: DLS] and Beach Energy [ASX: BPT]. Taking a look at the charts, both have been in strong downtrends since about August. Mr Market is giving his verdict — thumbs down — for now.

According to Angela, writing in the AFR, the next test for the industry is Chevron’s decision in March on how to continue with its venture with Beach in the Cooper Basin.

I’ll be keeping my eye on those charts above — they’ll tell you what you need to know.


Callum Newman
For The Daily Reckoning Australia

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Callum Newman

Callum Newman

Callum Newman is the editor of The Daily Reckoning and Associate Editor of Cycles, Trends and Forecasts. He also hosts The Daily Reckoning Podcast. Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect. To have Callum’s thoughts and insights on the current state of the currency, commodities and stock markets delivered straight to your inbox, take out a free subscription to The Daily Reckoning here.

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3 Comments on "Trading Oil Futures – Sorting the Strong from the Weak"

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slewie the pi-rat
slewie the pi-rat
2 years 10 days ago

allegedly, the Saudis are tanking the price of oil in cahoots with the US State Dept.’s ME “strategies”.
health scares and travel/airport restriction aren’t helping.
plus, the chance of a global downturn.
and, of course, the commodities trend, also.
Giant Vamire Squid Commodity Index [not including today]:

let’s go to “East” Africa [whatever on earth that means] and drill, baby, drill!
you first, ok?

2 years 9 days ago
It is only when you read of the 18th-19th century history of British banking humbugs, with their new world fantasy collateral, and funny money generated at home that you can appreciate this one…. Back then they had the gunships to effectively turn bad collateral created out of unsustainable asset & growth positions into good. Now-a-days, though, they’ve got zip demonstrated ability to hold a foreign vassal state territory successfully – one that they have shaken down with predatory lending – the same that created a bad asset based bubble that they could pretend to be all indignant about when… Read more »
2 years 9 days ago
On oil, there’s lots of propaganda around citing how the US is using the Saudis to shake down and destroy the Russian state using the Saudi production push and their lower cost of production to get at them…. This is the typical western propaganda narrative disconnecting with reality. Russia has floated its exchange rate – Russia’s cost of production gets lower as the ruble that drives most of their production costs gets lower ….. Russia’s import volumes drop as the floating ruble drops….. the USD melts up as USD debt positions are unwound – before it melts down A… Read more »
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