Wednesday, October 8, 2014

Crude Oil Futures Curve Has Flattened Out



The crude oil futures curves, at the beginning of the year in green and right now in orange. They've flattened out. Oil for delivery any time after about three years from now is more expensive now, even after a big correction in oil, than it was at the beginning of the year.

It's interesting; oil names have gotten crushed across the board, but anything with long reserve life should probably have higher present value now because the out year contracts have rallied.

Doing some rough math, at a discount rate of 10% the next 9 years of oil contracts are worth about $480 now vs $470 at the beginning of the year.

With Canadian Oil Sands getting slammed down almost to a three year low (down 25% from July peak), all that oily dirt in the ground is looking cheap.

7 comments:

John said...

You know! Commodities and commodity producing stocks are the only stuff out there that is reacting to fundamentals! The resource sector is telling the truth. The cocktail stocks and momentum favorites are telling lies!!

CP said...

Inflation/mania -> tightening -> deflation/crash -> printing

This is a positive feedback loop. One would expect the oscillations to become wilder as people attempt to "get in front of" the next step, and that does seem to be what has happened over the past 15 years or so.

Anonymous said...

CP, I do think there is overproduction issues with oil (or, rather, national economies which rely too much on it). Saudis, Russians, Iranians, etc are competing for market share and can afford to reduce prices with a strong(er) US dollar. Producers like locking into fixed prices so it is reasonable for oil futures to be trading at a premium when prices drop. No matter what math you do, the slope of the oil price curve won't become positive until producers constrain supply. I don't see this happening over the next year or two, and while there may be value in initiating a long Canadian Oil Sands with at least a 3-5 year horizon, there likely is more by shorting overleveraged oil exploration companies (which need higher oil prices to service their debt) over the next year or two before going long on oil and/or oil producers.

Anonymous said...

Quicksilver Resources ($kwk) is a declining oil producer that makes a good short candidate, by the way. As is Quicksilver, Inc ($ZQK) in the fashion area (as they as have overproduced inventory / diluted brands) and are shipping less volume to wholesalers in shopping malls. Nobody is going to get rich off of silver quickly!

Anonymous said...

The bonds of $KWK and $ZQK are trading at distressed levels. So, both are low hanging fruits. Hope you will follow these credit bubble stocks and report on more that are similar to them.

CP said...

"Don't have a view, but that still no one is talking about the path of natural gas during the shale revolution as an analog for crude is odd."

https://twitter.com/ACapMgmt/status/520610669012328448

CP said...

Also, see the new post:
http://www.creditbubblestocks.com/2014/10/commodities-and-producers-are-just.html