Energy Markets and the Waiting Game
By Dan Dicker - Jan 10, 2014, 4:31 PM CST
Sometimes I regret being an energy focused trader, because frankly, nothing much has been happening to make an energy trader happy -- crude prices have been range bound, stocks have had limited runs and those that have run are looking tired at their highs.
Not that I think things will stay this way for long -- one of the plusses of being an energy focused trader is that you can depend upon volatility returning -- you just have to wait around a little. This is that waiting period.
So we're forced to move away from the big-themed ideas that have kept us interested through much of 2013: Domestic exploration and production companies will languish as the fourth quarter reports are being prepared; production numbers will likely again be through the roof. We'll talk more about that as the numbers are revealed, but there's a reason that West Texas Intermediate prices have declined 7% in the last week and a half with no apparent catalyst.
Refining has been another big themed idea of mine through 2013 and into the new year, but with talk increasing around an end to the crude oil export ban, those shares are going to be rising but dangerously so, dancing on a knife's-edge in the near future based on unpredictable government action.
What's left? Well, from a trade perspective, there's obviously one sector we need to do a deep dive (pun intended!) and try to get some perspective on even to trade around a position, but oil services proves the point that…
Sometimes I regret being an energy focused trader, because frankly, nothing much has been happening to make an energy trader happy -- crude prices have been range bound, stocks have had limited runs and those that have run are looking tired at their highs.
Not that I think things will stay this way for long -- one of the plusses of being an energy focused trader is that you can depend upon volatility returning -- you just have to wait around a little. This is that waiting period.
So we're forced to move away from the big-themed ideas that have kept us interested through much of 2013: Domestic exploration and production companies will languish as the fourth quarter reports are being prepared; production numbers will likely again be through the roof. We'll talk more about that as the numbers are revealed, but there's a reason that West Texas Intermediate prices have declined 7% in the last week and a half with no apparent catalyst.
Refining has been another big themed idea of mine through 2013 and into the new year, but with talk increasing around an end to the crude oil export ban, those shares are going to be rising but dangerously so, dancing on a knife's-edge in the near future based on unpredictable government action.
What's left? Well, from a trade perspective, there's obviously one sector we need to do a deep dive (pun intended!) and try to get some perspective on even to trade around a position, but oil services proves the point that we don't have a lot of opportunity right now as we wait for a stronger spot to reinvest in our 'favorite zones'.
As shale in the US continues to overheat with a limited and limiting opportunity for service companies, there has to be a rebound in the more fundamental and known production areas around the world that continue to be developed. Not everything is a US-centric trade, and the large, multinational services companies which so far haven't expanded much in 2013 will benefit from that expansion, particularly as the shale plays in the US reach their limitations on efficiencies -- a limit that comes more quickly as the maniacal craze for shale production gets ever hotter.
Again, we'll revisit this idea many times in the future -- but for now, let's look at one stalwart of drilling services on the chart to prove this point, Baker Hughes.
BHI is one of my favorite oil services companies and a great trading vehicle and I often refer to the chart of BHI to get another view of the trajectory of energy markets. This view isn't immediately encouraging. After a very strong 3rd quarter report, Baker-Hughes seemed off to the races, but the limited and limiting forces from US shale drilling, combined with dropping rig counts has cratered the stock in recent weeks.
Despite the recent "filling of the gap" on the chart that the 3rd Q report created, I'm not ready to say that the downturn in BHI, or for that matter, any of the large services companies is over. We're in a vortex created by upcoming shale oil production numbers that again will be huge and will continue to put pressure on crude prices domestically. Until that fog clears a bit, I'm not ready to do anything big or long-term.
My recommendation for this week remains: trade small and raise cash.
