The geopolitical premium

Oil has been rising steadily over the past month:

This is, in large part, due to the geopolitical premium that has built up in the commodity on fears of supply disruption from a potential strike on Iran from Israel. Other commodities have been roughly flat, with the notable exception of Natural Gas crashing through the floor:

Until we start seeing more consolidation and shutdowns of natural gas drillers and producers, this supply-demand picture is not going to be changing anytime soon. Big fish such as Encana (TSX: ECA) look cheap, but until we start seeing liquidations of smaller players or spontaneous construction of significant amounts of natural gas burning facilities, I would not be touching natural gas commodities. Notably in the peak of the last economic crisis, natural gas went down to US$2.5/mmBtu and at that level it would bankrupt most leveraged small producers. Larger companies like Encana just need to wait with a pile of cash and mop up when the time is right.

As for the oil markets, it will remain volatile as traders are seemingly using it as a proxy for geopolitical event risk.

2 thoughts on “The geopolitical premium”

  1. Reader – would you rather listen to Sacha, who has zero expertise in the nat gas markets, or Aubrey McClendon, the foremost expert and CEO of CHK?

    Here’s what the smart money is doing…

    CHK, who controls 8.3% of US natural gas production, is planning to keep its gas production essentially flat until 2015+. No increase in supply from the 2nd biggest nat gas producer should put upward pressure on gas prices.

    CHK took off all of its hedges this quarter (3Q11). This is very telling, as their hedging program is not used just to hedge, but to make money. Since 1Q06, they’ve had $8.1BN of realized gains (best in the industry); positive contribution in 21 of the past 23 quarters.

    McClendon 3Q11: “The future’s curve is currently pricing natural gas, we believe, incorrectly because the same company that helped bring you the gas oversupply is now dedicated to increasing its liquids production, and its gas production will not increase much from here.”

    McClendon, 3Q11: “Gas price is way down that we didn’t think were justified by supply-demand fundamentals. We feel like the bottoms are in, in the natural gas markets.”

    Last point: the US Government is just now pushing the Boone Pickens energy independence plan, making natural gas more a part of the US energy usage. The passing of this bill in some form would be a huge positive surprise in the natural gas markets and lead prices higher.

    I’ll let the reader decide whom to believe.

  2. Has the anonymous troll turned into a stalker?

    You couldn’t have picked a worse CEO to pick quotations from, at least you should have chosen Anadarko or practically any other major producer.

    McClendon, 4Q2008, after he was forced to sell 31.5 million shares of his company on a margin call, bringing the market value from $20 to $12/share: “I am very disappointed to have been required to sell substantially all of my shares of Chesapeake. These involuntary and unexpected sales were precipitated by the extraordinary circumstances of the worldwide financial crisis. In no way do these sales reflect my view of the company’s financial position or my view of Chesapeake’s future performance potential. I have been the company’s largest individual shareholder for the past three years and frequently purchased additional shares of stock on margin as an expression of my complete confidence in the value of the company’s strategy and assets. My confidence in Chesapeake remains undiminished, and I look forward to rebuilding my ownership position in the company in the months and years ahead.”

    The guy has single handedly lost and made more money than you and I combined. Like the Donald Trump of the oil and gas industry.

    Anyhow, I am supremely tired of anonymous trolling so good riddance.

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