BP’s bond investors are getting a little spooked.
BP Bonds - Click to Enlarge
Lessons to be learned here, forsure.
Make no mistake, each joule we burn, is cheaper than the next.
So this in the context of EROEI, is this the form a write-down takes? Penalty to share holders. Penalty to bond holders. Penalty to the environment. Drives up the cost of capital, taxes, fines, and overhead…leading to, climbing energy prices.
No position. Unless you count being employed in the energy industry.
It’s days away, maybe a week, depends on what the dollar does. But I think…since…
…the volatility of oil has collapsed:
and since the curve is also collapsing…
I feel it is likely a smart time to buy at least half as much 2012 crude oil call verticals, as I ever plan on owning. I’ll save half my powder, for when my position gets cut in half. Crossing fingers I get the chance to.
I’ve been watching, and collecting a little data, on the oil curve. Monitoring the March – July, we saw 28% higher prices between those months, when I started making notes. That was only a week or so ago. When the March contract settled, it was near 13%. Now looking at the April – Aug price action, we now have a curve at about 14%.
I think the move higher on oil, will only begin when the curve actually settles down. And we’re seeing that start this week. That is, we won’t see the front month climb at the same rate the later months will, when oil starts to move north. The climb should start, with the front month climbing faster than the later months. Maybe this is obvious to some pros out there, but I’m relatively new to the oil game. Oil only got interesting to me, when we broke ~$60 on the way down. I mean, I followed it with the market, but the coming pop is something I want in on.
My thought process is, that the natural state of the curve should be in slight contango, a curve that equals the cost to store oil + the time value of money. While we have a steep curve, some supply projects can still move forward and push down the back half of the curve. It’s my logic that demand is a “near future” phenomena. And so, when firms plan to consume it, (or not consume it) they are doing so on the front part of the curve. So, the lack of current demand catches up with the back half of the curve, eventually, as time progresses. So, we’ll see the curve lie flat, when supply meets equilibrium, way into the future. Traders, the back half might fall to $40, or the front month might climb to $50, I don’t know. It will only be then, that the market will realize the coming oil shock, and start to move with veracity.
This is my logic, maybe not yours, chime in macro guys, I’m learning here.
No position in oil, or any derivative. (I got stopped out of my USO 2011 calls…phew)
Reflecting on the post by Gregor, where he noted that gold was buying too much oil.The option market seems to think, that there is more uncertainty in the price of oil, than gold. 
I’d like to point out, that plotting them on the same graph, has very little value.It’s the range where they currently sit, relative to their historic respective highs and lows.Oil is off ~20% off it’s highs, while Gold is off ~40%. Oil’s IV is 2x higher than its low, while gold is sitting at only 1.75x higher.
What was it, like less than a week ago, when the online discussion steered towards getting all aboard an increase/creation of gas/oil taxes (depending on the state), and I said they just need to spin right way. Well…ta da.
Soo…I spent the week, talking to some amazing new friends.
1. An engineer from Jacobs Engineering.
2. A doctor who works at the Aramco compound in Saudi Arabia.
3. An engineer who works here in Toronto in the industrial liquid storage industry -> ie a booming business to be in, if you’ve seen the oil contango curve.
After a very lively discussion from a group of informed people with different market perspectives, I took away, that it is likely that the new American administration eventually taxes oil imports. This is just one theory.
Thoughts?