Since you're making book recommendations I wanted to ask about Oil 101 by Morgan Downey if you're familiar with it. Or do you think Crude Oil Volatility better explains the tech and business of oil? I just started Oil 101 and the introduction is very Peak Oil which makes me wonder about the reliability of the rest of the book... Regarding your views on issues related to long dated oil futures I'd personally love to see you write a piece on that subject.
I love Bob McNally's Crude Volatility...but have not read the Morgan Downey book. thanks for heads up on it. And it's a good suggestion to expand on the topic of long-dated futures.
Excellent primer - a must read for anyone interested in Energy and a fantastic refresher for professional energy investors to print and keep at the desk. Thank you for sharing your intelligence and knowledge base with the rest of us!
Also, I remember reading something about how the change in the shape of the curve can be a good price signal for the future (rather than the absolute levels of the future contracts). E.g. if the curve goes from contango to backwardation, statistically speaking that implies a very high likelihood that spot prices in 12 months will be higher than today. Does that sound right to you or am I making this up (as I tend to do a lot :))
You are correct and was a point in the post. A steepening of the forward (e.g., going from contango to backwardation) Is a bullish indication and vice versa.
“ Unless you own physical storage infrastructure (a tank, terminal, ship, etc.), you can not "buy and hold" a particular month’s crude oil via futures contracts. “
Is that really true? If I think oil prices will triple over the next 3 years (so say so go from $100 to $300 / bbl) why can’t I just buy Jul-25 futures (which last time I checked were around $75/bbl) [or calls on them]?
And also wouldn’t royalty businesses be the better way to express this view rather than E&P?
Just discovered your blog and podcasts btw - they’re great. Keep them coming!
The specific question was on the front month's contract...which is not like a stock that one can hold into perpetuity. But you are correct that one could buy an out mouth futures contract (you give the example of July 25)...you'd have to believe that specific month's contract would triple by the delivery date (July 25 per your example), before which you'd have to close out assuming you can't take delivery of a physical barrel. But the nature of how that play's out is very different than owning equities.
Royalty companies are certainly an alternative to E&Ps and do eliminate some of the CAPEX/cost risks that go with E&Ps.
Another excellent columns ! I got the answer for #4 wrong. The twitter messages and space of Dr. Anas Alhajji in the past 7-8 months helped me a great deal in guessing the right answers. But it is your present column that gives a clear upstanding why those are right or wrong answers. I can not believe that I get such a high quality education from you and Dr. Anas Alhajji for free. Thanks again. Please keep the weekly columns coming.
You might be interested in this article on the relation between long dated futures and the breakeven price of new production. When I think about the long end of the curve I see it as the price of the last marginal barrel of oil needed to meet expected demand. In that sense it might be viewed as a kind of expected floor to prices based on current expectations regarding future demand and current expected production costs for the marginal barrel? https://www.dallasfed.org/research/economics/2019/0521?topics=Economic+Conditions
Four is the one most people seem to be getting wrong. It is subject to debate...as this of course is merely my opinion. It's difficult to explain how the long end of curve is a sense of where market participants expect long-term prices to settle out but that the front end of the curve is not a "forecast" or "prediction".
and thank you as always for the support and kind words!
Hey Arjun, I actually thought the explanation in #3 and the dynamics in play during that 04-07 run did a excellent job of setting the stage for the answer to #4. Admittedly #4 tripped me up too until I went back and re-read. Another great article!
By the way, I really like your description of the people who got none of the answers right. Many politicians are smart people. I suspect they sometimes have to pretend to be dumb for political reasons. However, compared with 1980s, the US certainly have more dumb and uninformed politicians today. When it comes to the energy policy, you just can't find a one worse than the current administration.
Since you're making book recommendations I wanted to ask about Oil 101 by Morgan Downey if you're familiar with it. Or do you think Crude Oil Volatility better explains the tech and business of oil? I just started Oil 101 and the introduction is very Peak Oil which makes me wonder about the reliability of the rest of the book... Regarding your views on issues related to long dated oil futures I'd personally love to see you write a piece on that subject.
I love Bob McNally's Crude Volatility...but have not read the Morgan Downey book. thanks for heads up on it. And it's a good suggestion to expand on the topic of long-dated futures.
Awesome guide . Something like this can only be produced by a very smart person, who has spent a decade plus thinking through the issues .
Per your endorsement I bot McNally’s “Crude Oil Volatility” 🙂
Excellent primer - a must read for anyone interested in Energy and a fantastic refresher for professional energy investors to print and keep at the desk. Thank you for sharing your intelligence and knowledge base with the rest of us!
very kind of you Deepak. thank you!
Also, I remember reading something about how the change in the shape of the curve can be a good price signal for the future (rather than the absolute levels of the future contracts). E.g. if the curve goes from contango to backwardation, statistically speaking that implies a very high likelihood that spot prices in 12 months will be higher than today. Does that sound right to you or am I making this up (as I tend to do a lot :))
You are correct and was a point in the post. A steepening of the forward (e.g., going from contango to backwardation) Is a bullish indication and vice versa.
“ Unless you own physical storage infrastructure (a tank, terminal, ship, etc.), you can not "buy and hold" a particular month’s crude oil via futures contracts. “
Is that really true? If I think oil prices will triple over the next 3 years (so say so go from $100 to $300 / bbl) why can’t I just buy Jul-25 futures (which last time I checked were around $75/bbl) [or calls on them]?
And also wouldn’t royalty businesses be the better way to express this view rather than E&P?
Just discovered your blog and podcasts btw - they’re great. Keep them coming!
The specific question was on the front month's contract...which is not like a stock that one can hold into perpetuity. But you are correct that one could buy an out mouth futures contract (you give the example of July 25)...you'd have to believe that specific month's contract would triple by the delivery date (July 25 per your example), before which you'd have to close out assuming you can't take delivery of a physical barrel. But the nature of how that play's out is very different than owning equities.
Royalty companies are certainly an alternative to E&Ps and do eliminate some of the CAPEX/cost risks that go with E&Ps.
Thank you for the kind words on Super-Spiked!
Hi Arjun,
Another excellent columns ! I got the answer for #4 wrong. The twitter messages and space of Dr. Anas Alhajji in the past 7-8 months helped me a great deal in guessing the right answers. But it is your present column that gives a clear upstanding why those are right or wrong answers. I can not believe that I get such a high quality education from you and Dr. Anas Alhajji for free. Thanks again. Please keep the weekly columns coming.
You might be interested in this article on the relation between long dated futures and the breakeven price of new production. When I think about the long end of the curve I see it as the price of the last marginal barrel of oil needed to meet expected demand. In that sense it might be viewed as a kind of expected floor to prices based on current expectations regarding future demand and current expected production costs for the marginal barrel? https://www.dallasfed.org/research/economics/2019/0521?topics=Economic+Conditions
Thank you. And that's one of my graphs in there! (to be clear, work I had contributed to during my time at GS.)
Four is the one most people seem to be getting wrong. It is subject to debate...as this of course is merely my opinion. It's difficult to explain how the long end of curve is a sense of where market participants expect long-term prices to settle out but that the front end of the curve is not a "forecast" or "prediction".
and thank you as always for the support and kind words!
Hey Arjun, I actually thought the explanation in #3 and the dynamics in play during that 04-07 run did a excellent job of setting the stage for the answer to #4. Admittedly #4 tripped me up too until I went back and re-read. Another great article!
Cheers
By the way, I really like your description of the people who got none of the answers right. Many politicians are smart people. I suspect they sometimes have to pretend to be dumb for political reasons. However, compared with 1980s, the US certainly have more dumb and uninformed politicians today. When it comes to the energy policy, you just can't find a one worse than the current administration.
Great article...so many basic misconceptions.
Thank you J J!