I've written blog style today for a quick overview of the energy sector, and how to trade it in the coming week:
- The word Thursday morning from the Organisation of Petroleum Exporting Countries (OPEC) meeting in Vienna was an unsurprising zero: There will be no output changes from the member states and no appointment of a new secretary -- whose nationality might give some insight into the cartel's organizational direction over the next few years. Will he be an ally of Saudi Arabia, willing to change outputs to match demands and price? Or will he be an ally of Iran, needing to pump the maximum, regardless of the economics, to fund a shaky economy? For now, the status quo in output indicates a bearish price move, as shale oil from the U.S. has affected total global supply while demand is only slowly recovering, now at only 88 million barrels per day. I continue to believe that oil is not a sale: Though the fundamentals indicate a drop, there is still correlation with rising stock indices and the financial balloons I wrote about extensively in my book, Oil's Endless Bid. I do not see prices going below $87 per barrel in the near-term, with upside potential still.
- BP (BP) has abandoned development of its enormous $10 billion Mad Dog oil field in the Gulf of Mexico, for now at least. There's a simple case about the money necessary to develop versus the output and price of the underlying crude. I was excited about BP and recommended it based on the further development of Mad Dog. I need to reassess the stock now. I cannot question the decision by BP, but it proves that deepwater assets are fickle and can throw up capex requirements that make them, at least temporarily, uneconomic.
- In the same vein, Petrobras (PBR) announced that one of its major offshore finds in the Lara field is showing poor flow rates and will need further fracking technologies to release the massive projected reserve there. I've never been a fan of Petrobras, mostly because I feel the government interest is too large and because capital expenditures to develop the Frade field and other offshore assets have been incompetently handled (including the unnecessary building of multi-billion-dollar deepwater rigs). But the Lara field also shows how tough a nut offshore Brazil is to crack: deep and technically challenging. Chevron (CVX) is also deeply engaged in the Frade, by the way.
- Marathon (MRO) has abandoned its sale of Canadian sands assets, which it planned to use in a huge stock buyback plan. Marathon has been a sector leader since spinning off its downstream assets into Marathon Petroleum (MPC). I don't know whether the bids for its Athabasca oils sands assets were weak because of the Keystone XL pipeline issue or because Western Canadian Sour (WCS) crude futures prices have been so weak. But I do believe that Marathon has done too well, too fast. This might slow its parabolic rise a bit.