Future strategy to survive discovering 1 out of every 20 bbls of oil we now use.

[Cardboard]

The cut will only take effect early after New Year so we are looking at roughly two months from now before we see reduced cargos arriving in the U.S. So unless we see continued draws in inventory (we should but Libya and Nigeria are wildcards), I have a hard time seeing a huge rally from here. Up to $55 WTI ok, but beyond that I have doubts.

 

I think you guys are right to trade around core positions and that is something that I need to do more going forward. It allows you to increase your returns by taking advantage of short term volatility while still holding on to your long term thesis.

 

Cardboard

[Uccmal]

The cut will only take effect early after New Year so we are looking at roughly two months from now before we see reduced cargos arriving in the U.S. So unless we see continued draws in inventory (we should but Libya and Nigeria are wildcards), I have a hard time seeing a huge rally from here. Up to $55 WTI ok, but beyond that I have doubts.

 

I think you guys are right to trade around core positions and that is something that I need to do more going forward. It allows you to increase your returns by taking advantage of short term volatility while still holding on to your long term thesis.

 

Cardboard

 

One can only hope.  When I started with PWT over two years ago I traded in and out but the results were not so good as we know.  Although, like FFH in the early 2000s the upside of really getting to know something worked out very well, in the end.  These days I have much more capital to 'play' with, without jeopardizing my longer term.  I can trade around positions without losing my income stream. 

 

 

[Joe689]

Nice healthy pullback right before the non-OPEC meeting this Saturday.  Russia will not screw this up, they need higher prices.

 

Thought this article was good:

 

http://www.argaam.com/en/article/articledetail/id/457707

 

[Cardboard]

The key here IMO for higher oil prices in the short term, and to see if we were right or totally wrong, are continued draws from U.S. inventories and flatish U.S. production.

 

Although, the return of more oil from Libya and Nigeria is challenging the fundamentals, you would still expect the global supply and demand fundamentals to be in a small deficit right now or before the OPEC/non-OPEC cut taking effect in January. That is essentially what the Saudi oil minister was saying that Sunday before the OPEC meeting or that fundamentals would be balanced in 2017 even if they did not act.

 

Cardboard

[Cardboard]

API report indicates that U.S. oil inventories were down 2.2 million barrels vs expectations for a decline of 1.7 million.

 

Let's see what EIA has in store for us tomorrow.

 

Cardboard

[Uccmal]

Nice healthy pullback right before the non-OPEC meeting this Saturday.  Russia will not screw this up, they need higher prices.

 

Thought this article was good:

 

http://www.argaam.com/en/article/articledetail/id/457707

 

It was a good interview.  I disagree with his medium/long term assessment.  Alternate automobile tech. is coming on faster and faster.  And whether or not the US feds maintain subsidies is not so relevant.  Many of the states will maintain them, and some of those are long term Republican.  If subsidies are even that relevant anymore. 

[Cardboard]

Oil inventories are down 2.4 million barrels according to EIA or in line with API.

U.S. production is also down 2,000 bls/d or essentially flat.

 

It would have been a good report considering that OPEC has not cut yet if gasoline had not climbed by 3.4 million barrels and distillates by 2.5 million. However, overall products are up only 1.4 million barrels despite these figures.

 

Net imports of oil were up 5.11 million barrels for the week while refineries only took in an additional 0.938 million barrels. Then you have adjustments of 2.975 million barrels.

 

Tough to see what is going on with the numbers on a weekly basis but, if you look at the last 3 to 4 months, it was in deficit and now very stable. There were impressive draws when we least expected it or during the refinery turnaround season and since the end of that, inventories remain pretty much flat. It appears that OPEC increased production played a major role or Libya and others.

 

Cardboard

[Uccmal]

Oil inventories are down 2.4 million barrels according to EIA or in line with API.

U.S. production is also down 2,000 bls/d or essentially flat.

 

It would have been a good report considering that OPEC has not cut yet if gasoline had not climbed by 3.4 million barrels and distillates by 2.5 million. However, overall products are up only 1.4 million barrels despite these figures.

 

Net imports of oil were up 5.11 million barrels for the week while refineries only took in an additional 0.938 million barrels. Then you have adjustments of 2.975 million barrels.

 

Tough to see what is going on with the numbers on a weekly basis but, if you look at the last 3 to 4 months, it was in deficit and now very stable. There were impressive draws when we least expected it or during the refinery turnaround season and since the end of that, inventories remain pretty much flat. It appears that OPEC increased production played a major role or Libya and others.

 

Cardboard

 

This is usually the lowest demand time of year, and often the lowest time of year for crude pricing as well.  Discerning a trend with all the background noise is near impossible.  We will really only see it in retrospect.  It amazes me that with all the information available across the world we really have no handle on the worlds second largest commodity group, after food. 

 

If the Opecs started secretely producing less, we wouldn't really notice it until people actually started to have trouble buying product. 

 

 

Very few people actually saw the world going into a glut in the 2010-2014 range including most oil professionals.  Why would we expect this to be any different? 

[Cardboard]

It is in the bag or 558,000 bls/d reduction from non-OPEC on top of the 1.2 million committed by OPEC:

 

http://www.reuters.com/article/us-opec-meeting-idUSKBN13Z0J8

 

This should really reduce worldwide inventories in 2017 and put stability in the oil price going forward.

 

Cardboard

[Uccmal]

It is in the bag or 558,000 bls/d reduction from non-OPEC on top of the 1.2 million committed by OPEC:

 

http://www.reuters.com/article/us-opec-meeting-idUSKBN13Z0J8

 

This should really reduce worldwide inventories in 2017 and put stability in the oil price going forward.

 

Cardboard

 

Showing in the futures market now. 

[sculpin]

Don't fight the Saud...

 

https://www.bloomberg.com/news/articles/2016-12-11/saudi-minister-jolts-oil-market-with-whatever-it-takes-moment

"I can tell you with absolute certainty that effective Jan. 1 we’re going to cut and cut substantially to be below the level that we have committed to on Nov. 30," he said, signaling that if the market demanded it, he was ready go below 10 million barrels -- a level it has sustained since March 2015.

[sculpin]

From Acumen. The market is already balanced even before the OPEC cuts.....

 

IEA Oil Market Report

 

Do you know what day it is?  If you said IEA Oil Market Report Day you would be correct.  A couple of items from the release this morning:

 

1.        Demand was revised up in 2016 and 2017.  This should come as no surprise to readers of this note who know that the IEA almost ALWAYS increases demand forecasts through the year.  2016 goes to 1.4 mb/d and 2017 to 1.3 mb/d.

 

2.      Massive revisions to OECD oil stocks occurred.  August, September and October were ALL revised way down with draws in each at a time when builds should be occurring.  I mentioned yesterday that the market sure looked more or less balanced and the data today seems to confirm that with another draw in November expected.  This run of declines in oil stocks is the longest run since 2011.

 

3.      IEA projects a deficit in 2017 based on the OPEC announcements of late which amount to about 600k b/d.  the Q4 figure below looks a little wonky to me given draws in October, expectations for one in November which means it had better be a whopper of a build in December.  Look for another revision to come….

 

Overall, it is a dangerous game to be running off the IEA model given the persistence of revisions higher in demand that occur nearly every year.  The IEA has done a good job of writing awesomely negative headlines featuring “gluts” and “overhangs” which the market takes hold of.  But the devil is most often in the details when it comes to the IEA and the revisions are one key area keen market watchers ought to look on a regular basis.

[DooDiligence]

Just for fun; any thoughts on what effect Tillerson will have?

[Joe689]

Does the IEA ever have an idea of what is going on?  Wouldn't want to have their job.  Too many dynamic forces at hand.    OPEC/Saudi is going to get the price they want.  The million dollar question is what price do they want?  To get that price, all they need to do is increase/decrease of more production.  They are back to being a cartel and will control prices.    My wild guess is that they want 55-60 quickly, and future contracts to stay near same/backwardation to prevent banks/shale from getting too speculative. 

 

I think the low cost, nimble producers will outperform the majors because of this.  I expect more consolidation because of this as well. 

 

As for Tillerson, who knows.  One would expect this to be bullish oil.  He is a oil capitalist. 

[Uccmal]

Just for fun; any thoughts on what effect Tillerson will have?

 

No comment.  There already several threads discussing US politics.  Take it over there. 

[DooDiligence]

Just for fun; any thoughts on what effect Tillerson will have?

 

No comment.  There already several threads discussing US politics.  Take it over there.

 

Yeah; sorry, it's not like the CEO of Exxon becoming SecState would be an important development in oil markets.

[Uccmal]

Just for fun; any thoughts on what effect Tillerson will have?

 

No comment.  There already several threads discussing US politics.  Take it over there.

 

Yeah; sorry, it's not like the CEO of Exxon becoming SecState would be an important development in oil markets.

 

Baiting me :-). 

[Cardboard]

"Does the IEA ever have an idea of what is going on?"

 

They do but, their modus operandi is to manipulate prices down. Everything they do seems to point in that direction. IMO, they are a Western agency paid to keep a lid on prices.

 

If the quarterly surplus had been as large as they mentioned since 2014, all tankers, farm tanks, would be full right now and that is not the case. 2 to 3 million barrels/day surplus is just over 900 million barrels/year. For perspective, the entire commercial U.S. inventory is 486 million barrels. Sure it did climb over the past 2 years but, nowhere near what these estimates would suggest.

 

In other news, API is indicating tonight a build of 4.7 million which is unexpected. Analysts were forecasting a draw of 1.7 million. So once again, let's see what EIA has to say tomorrow and we will watch for gasoline and other inventories.

 

Cardboard

[sculpin]

What the IEA said today.....

 

''Massive revisions to OECD oil stocks occurred.  August, September and October were ALL revised way down with draws in each at a time when builds should be occurring.''

 

September 2016 the IEA was scaremongering:

'It reduced growth estimates for this year by 100,000 barrels a day to 1.3 million a day, citing a “dramatic deceleration in China and India” this quarter coupled with “vanishing growth” in developed economies."

“Demand growth is slowing and supply is rising,” the agency said. “Consequently, stocks of oil in OECD countries are swelling to levels never seen before.”

 

 

So lets get this straight they stated in Sept demand was 'vanishing' only to revise it upward three month later? They had 1million plus builds in Q2 & Q3 in Sept which now have actually vanished, while they stated stocks would swell like ''never been seen before'' yet we now know these months had draws!!! This before OPEC cuts...

Can there be a more dishonest & fraudulent macro energy forecast agency?

[Uccmal]

Just for fun; any thoughts on what effect Tillerson will have?

 

No comment.  There already several threads discussing US politics.  Take it over there.

 

Yeah; sorry, it's not like the CEO of Exxon becoming SecState would be an important development in oil markets.

 

 

Sorry DD, I cant really get my head around Trump, and his choices of surrogates.  I dont really know Tillerson, or if he will even get through the process in the US. 

 

The Us has had 'oil men' in cabinet before such as George Bush, and Cheney and prices went way up.

 

On the other hand fracking took off mostly after Bush left. 

 

Tillerson might advise Trump to forget about oil drilling in the US, buy cheap resources from elsewhere, and focus on solar and nuclear, for all we know.  To be certain, as CEO and a senior executive, he has alot of political experience, and an ability to look longer term.  Maybe he would take the chance to change his legacy - again who knows. 

 

On the other hand he may be hell bent on making the US, oil independent, which would probably bring prices down, but he knows that.  Lower prices mean lower profitability for all.  However, he is being nominated as SOS not the energy ministry.  So, his effect may be minimal in the energy sphere. 

 

We really cant know what will happen to US energy policy until it happens.  To be sure, everything will be more convoluted for Trump than his simplistic versions suggest (yep, we will open up,federal lands for drilling and lift off shore drilling - maybe).  He has Democrat senators to deal with, and Republicans who dont mind taking him on in the public arena.  Curiously, some of the Rep. run states are more alt. energy concious than most places in the world. 

 

Any, my take such as it is.

 

In the meantime, we have the Saudi's desperate to get the price of oil up.  They want the one off windfall of selling part of Saudi Aramco, to get the cash and diversify out of oil.  To me that is a signal that the Saudi's have read the tea leaves and are thinking 20 years out when peak demand has passed.  Why would anyone else be thinking any different.

 

Cheers, Al.

 

 

 

 

 

[DooDiligence]

Thanks Al; the last bit about the Saudis diversifying their economy is encouraging (maybe they can put a dent in terrorism by offering entrepreneurial prosperity in tech, manufacturing, medical.)

 

They were first rate before the whole crusades thing (not sure when the decline began...)

 

I only glanced at headlines re: Exxons interest in alternative energy & I really need to read more about Tillerson (not that I could do anything with the knowledge...)

 

I was kind of being lazy & looking for someone to spoon feed me my opinion about the guy.

 

Thanks again for the response!

[SharperDingaan]

Pick a few big, medium, and small names - and look back at the IEA announcements over the last 5 yrs. Assume a bet of 1000 shares per name against the IEA announcement at the start of a period (5yr, 4yr, 3yr, etc.), that was 100% sold/repurchased over time - directly contrary to the IEA forecast of the time. It produces interesting results. A simplification is to just look at the revisions.

 

Hurricane Katrina illustrated just how incompetent FIMA was; investigative journalism later highlighted what FIMA was actually doing.

FIMA is not the only US agency with significant 'deficiencies', but they will never 'surface' unless there is an 'event'. It is highly likely that had there never been a 'Katrina', very few would have been any the wiser about FIMA.

 

The weekly forecast is just a random number generator producing numbers to trade against.

It serves a market purpose (produces trading volume commission), but it is not about accuracy. A monkey throwing darts is not 'citable' - a government agency is.

 

SD

 

What the IEA said today.....

 

''Massive revisions to OECD oil stocks occurred.  August, September and October were ALL revised way down with draws in each at a time when builds should be occurring.''

 

September 2016 the IEA was scaremongering:

'It reduced growth estimates for this year by 100,000 barrels a day to 1.3 million a day, citing a “dramatic deceleration in China and India” this quarter coupled with “vanishing growth” in developed economies."

“Demand growth is slowing and supply is rising,” the agency said. “Consequently, stocks of oil in OECD countries are swelling to levels never seen before.”

 

 

So lets get this straight they stated in Sept demand was 'vanishing' only to revise it upward three month later? They had 1million plus builds in Q2 & Q3 in Sept which now have actually vanished, while they stated stocks would swell like ''never been seen before'' yet we now know these months had draws!!! This before OPEC cuts...

Can there be a more dishonest & fraudulent macro energy forecast agency?

[DooDiligence]

A Sharper perspective!

 

After nearly 35 years in the industry I know virtually nothing except how to run a boat.

 

I'm gonna wear my monkey suit all next year...

[Cardboard]

EIA indicated U.S. oil inventories down 2.6 million barrels or quite the opposite from API. Overall inventories of petroleum products down 2 million barrels.

 

I would say that this is good since ahead of expectations and OPEC has not cut yet.

 

What is not as good is a climb in Lower 48 States production of 101,000 bls/d. With more rigs in the field and some drilled but, uncompleted wells likely coming on stream this could be expected. It has been pretty flat over many weeks so we need more data to see if an uptrend is forming or not.

 

Cardboard

 

[sculpin]

https://www.islainvest.com/2016/12/22/letter-to-investors-december-2016/

 

Dear Investors,

 

From January 1 through November 30, 2016, net of all fees, the Tarpon Folio is up 91.8% compared to an increase of 9.8% in the S&P 500 over the same period.

 

As of the market close last Friday, December 16, Tarpon is up more than 100% year-to-date, after fees, on an unaudited basis. So I am pleased to report that it appears that you will have doubled your money in Tarpon in 2016.

Merry Christmas.

 

Thank you for hanging in there after a tough 2015. We are succeeding unconventionally. And we are not done yet.

We now have two ten-baggers in Tarpon. I have made no trades since August. And subsequent to that investor-only email I sent in early November, OPEC cut production, as expected, putting a floor under oil prices and formally closing out one of the most head-scratching chapters in the history of the oil market.

 

My expectation, in short, is that oil will continue to grind higher in 2017. Global oil flows now look to be in deficit, while elevated oil stocks will be drained further by the recent OPEC/non-OPEC production cut agreement.

 

I also believe the risk of sleepwalking into a supply crunch in either ’17 or ’18 remains uncomfortably high. That risk is due to several pro-cyclical idiosyncrasies of today’s oil market, the most notable of which is the inconsistent quality of global production and inventory data. IEA numbers in particular are, on occasion, confounding and irreconcilable, appearing to obscure or conflate trends in production and/or inventories which would otherwise be price-supportive for oil.

 

I suspected it a year ago, and now unequivocally believe it: there are some strange things in that macro oil data – whether Gulf of Mexico oil production forecasts, OECD inventory stock revisions, or the obscuring of oil-versus-condensate storage levels here in the U.S. All of which makes the forward curve even less predictive of future oil prices than it already is.

Get on it, 60 Minutes.

 

In any case, our companies remain resilient, and our returns in Tarpon next year should be attractive enough that I believe my primary goal as your portfolio manager is to avoid doing anything that might cut the compounding process short.

So let the record show that it’s in your best interest if I do a lot of fishing next year.

But let’s not get cocky – nor forget the role good luck played for us this year. We’ll all be better off if we ratchet down our expectations for 2017.

 

We found a glitch in The Matrix last year. It continues to be exploitable in a reasonably systematic way via the shares of deeply undervalued U.S. E&Ps – without using margin, derivatives or algorithms – although on occasion it does require some scotch. And we are not done taking advantage of it yet.

 

As a reminder:

Stock prices are not data. They are an opinion. To a value investor, they are an opinion about the future earnings power of a company. That there is a lot of data available to form an opinion about a company’s true value should not be confused with the idea that all opinions about stock prices are equally valid.

 

The vast majority of the time, the market values companies correctly – or, at least, an investor should start by assuming the market is correct. But every so often, the market makes a grievous error that alert and patient investors can exploit. And for Tarpon, this has been of those times.

 

Please understand that because of what we stand to gain the next few years, I will make no apologies for whatever short-term volatility may come as a result of continuing to hold our current Tarpon companies, at their current portfolio weights, for an indefinite period of time.

 

We own good assets, bought at even better prices, which produce a critical product that many in the market don’t appear to realize may temporarily be in short supply in the not-too-distant future. The primacy of price over all else in the oil market has been nearly absolute. But it is also untenable. I continue to believe this is a perfect storm of cognitive biases, incentives, ambiguity and groupthink on Wall Street that we can take advantage of.

 

And my job, essentially, is to not screw it up. So we are going to take every penny the market gives us in 2017.

Right now, though, there is a worrisome oversupply of eggnog in Islamorada.

 

And. I. Am. On. It.

 

I’ll have more thoughts on Tarpon, OPEC, the new U.S. administration and the shale industry’s response to higher oil prices in a few months.

 

In the meantime, Happy Holidays!

Peace, love and cash flow.

– Cale