I keep hearing everyone talk about this - oil is up a good bit again, well over the level that pretty much anyone (shale, sands, etc.) can make money producing. But energy stocks are still waaaay off their highs. Any thoughts on why? Thanks.
Oil price is its own worst enemy. Price goes up, more production comes on line => drives price down. If the oil investment price isn't as high as you hope, likely it's because investors know any spike in price is only temporary and are anticipating the subsequent decline. Oil is to be TRADED... not an "investment".
Exactly. And in those two short, simple sentences, you've neatly covered "the essential basic background stuff" that people need to know about oil before thinking about trading it (and exactly the information that's missing from most online "information" summaries about oil trading!).
Also consider that the world of oil prices isn't static and there's a known curve at which more supply comes online. You don't just "turn back on" oil sands, it's a many month process. At which point all the fracking that shut down because of low prices has already started back up, flooded the market, and prices are down again. The reason energy stocks are down in general is because the available supply is so vast at such low prices, not the current amount of oil that's available on spot.
Energy stocks have nothing to do with oil prices. They are toll operators, they make their money on QTY demanded. The reason oil stocks are volatile and trade at steep discounts to comparable companies is because of the volatility in their cash flows. They are as a group, very debt laden. And therefore HIGHLY sensitive to interest rates. If they can't roll their debt, they go under. These firms are very highly leveraged, always have been. The industry has always been like this. Not to mention many of these firms no matter how many times they swear at shareholder meetings that their trading operations are just for hedging, that's very far from the truth. They are HUGE speculators and therefore are vulnerable to huge trading losses. Honestly, the energy stocks are right on par with biotechs sans the trading aspect. The irony is, most of these firms benefit more from lower oil prices, not higher. The reason being that higher prices bring high cost producers on the supply curve. That's more competition to sell less oil at the same price. Remember, QTY, not price, determines their revenues. So in general, the ones with the least debt, more integrated names, and most conservative in terms of trading, will trade at a premium to the rest of the group. If you guys want to get some insight into this business, do a google search on the late Aubrey McClendon, who ran Chesapeake before he died. It was basically a hedge fund. The firm went from 5 million to 800 million back to almost bankrupt and then back to over a billion from the huge swings they had in nat gas trading. It's a fascinating company and he was a real interesting figure. Surely he was on the extremes but his legacy, just like the legacy of Enron, is all over the industry i.e. all the guys working there took that work ethos to other firms i.e Devon Energy.
"Energy" as defined for purposes of this conversation perhaps seem to be focused on crude oil and refined products. There are generally three types of companies along the transaction lifecycle - up, mid, and down stream. Think producers, refiners, and marketers. While they each have different ties to prices crude and refined products, the lifecycle and seasonal cycles between product specs require an average price over time for cash-flow to be fully impacted. Short-term rallies or dips have little impact vs quarterly and annual average daily prices. This typically better aligns with their swaps as well. Additionally, the crack spread and location basis is where many gains and losses are realized.
Because energy companies' profits are still below all-time highs. Energy stocks don't follow oil $'s: they follow energy companies' profits
At a certain price point, shale oil production will become more profitable and keep demand in check. US crude export is also surging. https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=mcrexus2&f=m