Monday, December 21, 2015

Maybe I should have taken his bet!

Several weeks ago, during a heated discussion on oil prices a good friend told me:  "You believe that oil prices are going down, put your money where you mouth is"

The bet was for oil to hit $30 before it would hit $50.  That bet -- was a sucker bet.  The marginal market is unknowable.  That's simply the truth is that one serious global event and oil prices can jump back to $80.  What is more interesting is where will oil be in 24 or 48 months.  Will it remain as cheap as today.

There are a number of factors at play:

  • Producers the world over have gotten use to the $80/100 bbl economic windfall; enabling them to buy off their citizen -- from Caracas to  Ryad the plan has been "buy off the natives"
  • US producers of expensive shall gas and oil have used "expensive" debt to fund their development.  Sunk costs are sunk!  Right now they are pumping as much as they can so that they can meet interest payments.  But soon even variable costs will not be covered.
  • Nearly 50% of all high yield debt is issued by E&P companies...
  • There are no massive growth pushes out there.  America just raised interest rates.  Although several economies have gone "negative" the overall impact is not working out as planned as banks are actually raising interest rates on consumer loans
  • 2016 is election year in America -- there will be no further tightening by the Feds (there may even be a reversal
  • America, as a net energy exporter, doesn't benefit from lower energy prices

So there we have it; oil (the sweetest kind) briefly dipped below $34 -- now around $35.  The trend tells me that oil prices are not done falling, at least until some fundamentals start changing.  The producers need to cash to keep the population happy, and users are in the same boat they've been for the past 12 months -- lower oil prices have not stimulated demand.

I shoulda taken that bet!


On a side note, yesterday I "fell" on a copper -- as value investing, video on you tube.  This video was from a guy who bought some pre 1983 pennies which with 95% copper content were worth twice as much as their face value.  That's when copper was trading around $4,000 a ton.  Today coper is around $2,000 a ton -- so our friend, who bought is pennies at a slight premium to their face value -- plus stored them for nearly 3 years is siting on an investment worth exactly what he paid for.  

Turns out it was a good store of value -- he didn't make a fortune, but on the other hand he didn't lose anything (aside from holding costs and inflation).  However, had he invested in the stock market his worth (assuming no tax impact) would have risen by nearly 50%.  Soooo maybe not the greatest strategy EVER!

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