The oil trade (long oil equities, short crude futures) was the first trade I posted when this blog started in Nov. 2006. link It's time to book the (very substantial) profits. Here's why:
1. The crude market has moved from a big carry to a big backwardation. Remember, a major rational of the trade was to collect the carry in crude. The current term structure is telling you that current oil prices are not driven by spec demand, but by real oil consumption.
2. If oil goes into blowout phase, the equities will not follow as hard. Equities are a long term investment, and will more or less follow the long term forward crude price. I doubt that Dec 2011 futures will blow out.
3. The downstream parts of the oil industry are starting to soften. There is a lot of refinery capacity being built around the world, and much of the output will come to the US. I also expect that coal and natgas prices will continue soft.
If you want to have continuing oil exposure, it's best to play the highly levered companies. I would recommend something like Canadian Oil Sands. This has a high breakeven oil price, but would generate huge profits in a blowout. Note that this is a pure spec on the crude price - not the kind of commodity/equity relative value that we mostly do here.
0 comments:
Post a Comment