Front-month futures for West Texas Intermediate crude briefly threatened $59/barrel this morning before pulling back to trade near the flatline. This has been a quiet day in the oil pits, and that is not a bad thing. As I have noted many times in my RM columns and elsewhere, much of the volatility in crude oil futures is a creation of traders themselves, and the hedge funds that drive those trades. As very, very few crude oil futures contracts ever see physical settlement, it is just paper chasing paper. That is magnified in the natural gas pits as that contract, known unaffectionately among traders as "the widowmaker," moves rapidly on very little information.
So, what can we make of an energy futures market in which both oil and natural gas futures are in a steady uptrend with very little volatility? Well first we have to make sure the numbers bear that out, and a quick check of the CBOE's Crude Oil ETF Volatility Index, OVX (sometimes referred to as the Oil VIX) shows a gradual decline over the past month. OVX now sits at about 27, a level which has shown support from a technical perspective. The oil markets are calm.
But how can that be with turmoil in Venezuela, constant maneuvering among OPEC members and continued horse-trading between the U.S. and China, the world's two largest importers of crude? I mentioned this in my RM column yesterday, but the key to investing profitable is tune out the market's noise and focus on key performance indicators.
For oil that is, not surprisingly, supply and demand. According to the IEA, global oil demand is running at about 100 million barrels per day now and global oil supply is currently running at 100 million barrels per day. The supply and demand lines on IEA's global oil balance chart intersect in 1Q19 and that is exactly what the markets are telling you with the slow steady move upward in crude prices this year after December's pullback. The stock market's rally from the Christmas Eve lows helps all risk assets, for sure, but the idiosyncratic nature of the crude oil futures curve is telling us something.
The current futures curve has a nice steady slope upward from today's front-month (April's contract) value of $58.50 to a figure of exactly $60/barrel for November's contract and then a slope downward. That is hakuna matata. Seriously, with all the sturm und drang about global energy prices I can't think of a time when the curve expressed such a carefree outlook.
So, either the idiots who fill your email inbox with rumors of secret pipelines and the death of fossil fuels are correct (they are not,) or this is a good time to be invested in securities that benefit from steady, yet upwardly-biased oil prices.
As I mentioned yesterday, I own Exxon Mobil (XOM) for myself and my clients, but that is not my favorite energy investment. No, the apple of my eye is still the 10% Series A Cumulative Preferred Stock issued by Callon Petroleum (CPE) . CPE-A is now trading at $52, a 4% premium to par, and so is "only " yielding 9.61% if bought today. I was able to add some more CPE-A when it fell below par in the market's swoon in mid-December. That basis-lowering plus the consistent reinvestment of dividends means that CPE-A is yielding near 15% for my longest-tenured clients.
It's just such a nice feeling to have a name your portfolio that makes you say "ahhhh." Callon paid that preferred dividend when oil plunged to $26 per barrel in February 2016, and I believe it is safe in any economic environment. That said, Callon management is aggressively pursuing acquisitions, especially in the Permian, so I doubt the company will be flush enough to use excess cash to redeem CPE-A, which has been callable since May, 2018.
So, yes, even an energy security can be a security blanket. Feel free to cuddle up with CPE-A and sleep better at night.