I am updating my WTI oil price expectations for the next several weeks to range between $50.00–$57.50 per barrel. The bottom oil-price limit is higher because geopolitical uncertainties have likely created a floor near $50 per barrel. The geopolitical uncertainties stem from the conflict between the Kurds and Iraqis, North Korea’s nuclear ambitions, and the potential for President Trump to decertify the Iran nuclear deal. Another positive factor is the upcoming OPEC meeting at the end of November where many expect the agreement limiting crude-oil output to be extended beyond March 2018. The top oil-price limit has been raised because, with recent WTI prices being near $54 per barrel, it leaves further room to the upside. At current prices, producers are hedging their future production and will, therefore, produce additional volumes that should damp further increases in oil prices. With oil prices near $54 per barrel, I expect that WTI is near the higher end of its near-term range.
Oil Update–October 2017
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Kevin, thank you for the update.
Previous conversation centered around the differences: refineries vs. production vs. pipelines vs. gasoline prices. With increasing bottom line and time line projections, have you also increased the specific area of the market or changed your opinion regarding stock selections, either long or short. I purchased a basket of pipelines about a month ago, but it appeared premature and thus sold two of the more controversial ones (ETE/ETP). However I added to EPD and KMI leap calls. In August, the explanation was less toll roading due to decreased transport and lower prices. Your increased price projection seems to concur that my “timing” might be on target…. The oil production business is complex and I know nothing about the differences in various markets. Your analysis re: price and space relationship to the stocks, is always appreciated. Thx Kevin for your trusting opinion.
Hello Diane, I have never been a big refinery type investor. While I am sure there is money to be made by nailing the cycles correctly, I see refineries as a tough industry. And it might be even more difficult if Tony Seba is even partially correct in his assumption that electric vehicles will play a significant role in the near future.
Pipelines are complex beasts too. I don’t think you can use a broad brush with pipelines. You have to know the individual companies. What are they transporting and to where? Are the volumes expected to increase or decrease? Are there opportunities for expansion? How are their tolls calculated?
You mentioned LEAP calls. I don’t ever buy LEAP calls. Typically the further out in time you go, the higher the implied volatility. The higher the IV, the more the options cost. The more the options cost, the less likely you are to make money.
If that’s the case, then why not short them? Because LEAPs are far out, they also have wide bid-ask spreads. So that hurts. It also hurts when buying them. But as a seller, I want decay. Decay on a long-dated option is very slow. I’d much rather go shorter-term.
In essence, LEAPs are not great vehicles for either the buyer (higher IV) or the seller (long time, slow decay).
I noticed a sea change in opinion from the summer to now. In the summer, everyone was gloomy. Now that we have begun to witness reduced inventory levels and there is reduced production because of geopolitical concerns, there is a lot of optimism. Pessimism and optimism seem to go in waves. With everyone so bullish now, I am somewhat fearful that something will pop up to cause concern.
As mentioned in my note, I expect that we are going to see higher lows. But I don’t think it is smooth sailing from here either. If everything was in balance, OPEC and Russia would not be looking to extend their cuts until the end of 2018.
My intuitive guess is that we are in a holding pattern for a while. I suspect my note does not provide much guidance.
Actually Kevin,
You underestimate yourself. Your opinions in the oil space and elsewhere are important to me. You share your knowledge with honesty and I trust you want the best outcome for your readers/friends. I will revisit the leaps, as I believed they would allow more time for the market recovery and I know each sector will behave according to it’s own market gyration. I am in still in self-discovery mode but very small. The pipelines had been a staple in my portfolio before discovering Dougie and the interaction online. I have been attempting to get back to basics, so to speak, as I have been off my path, but as the world and markets have changed, I count on a few for good advice. Thank you for the updates and the response.
I will revisit the leaps, as I believed they would allow more time for the market recovery and I know each sector will behave according to it’s own market gyration.
Just to summarize my earlier points, please remember the following: first, LEAPs are expensive because of higher implied volatility (IV) out in time; second, IV mean reverts, so you’re locking in losses before you even begin; third, LEAPs are less sensitive to price action and volatility; fourth, LEAPs have low liquidity, meaning large bid/ask spreads causing larger friction losses for you; and fifth, you have less number of trades so you can’t let the averages play out in your favor.
Sure, sometimes a LEAP will result in a large profit. But you’re running into the wind.
You can always buy the stock outright if you are truly bullish on it. If desired, you could layer a wide strangle with 16 deltas to bring in additional revenue.
I am sure you’ll make the right decision given your objectives, constraints, and risk-tolerance.