Oil: Saudi & US

Last year when oil prices were falling and threatened to reach lowest in the decade, everybody was blaming Saudi. Saudi officials went on the record asserting that “Stone age did not come to an end because we ran out of stones. Same is the case for Oil Age.” Fancy words to say Saudi is going to continue to pump oil and flood the market irrespective of the prices. Since new oil rigs had primarily opened up in America, they projected themselves as victims.
However this latest deal with Iran has raised some interesting questions:

  1. The deal primarily allows Iran to sell oil in the open market. In the short term the oil prices fell by $1.5-2 per barrel and are expected to go down even further. By adding a new oil producer, they essentially are sealing the fate of the new oil rigs that opened up in America.
  2. Most Middle East oil sells at Brent, but Americans sell at WTI price, which trades at $5-7 discount. The reason for this discount was American policy which prohibits export of unprocessed crude oil.
  3. Cheaper energy usually benefits mass production and long distance freight. So it benefits Chinese industry much more than it does to American economy.

Everybody at that time believed that new oil rigs, fracking, sand oils had caused a glut in the market. US from being an importer of crude has become an exporter of crude. What is worse that this transition happened in the winter season where the oil requirement for heating/furnace goes up substantially.
But if this was the case and oil lobby is really as strong as they are projected to be, then how did this treaty got ratified? Iran has a history of reneging from its promises, so I doubt if this has a long term benefits. However in the short term issues 1 and 3 got worse and issue 2 did not get resolved. I am sure there is a logical & strategic reason behind all this, but I know for sure that the reasons that were citied 6 months ago were all farce.


Oil Investment for Indians

In 2009, I invested a substantial amount in ONGC and Cairn, the only 2 oil production companies listed in Indian stock exchange. The oil price more than doubled but even after 2 years i made a measly 20-30% return. Not wanting to repeat my prior folly, I have embarked in a quest of how to gain in the event that Oil prices go up by 2017 (2 years from now)
1. Invest in India. No ways, I am not going to be at the whims and fancies of corrupt bureaucrats/ politicians , their fickle policies and administered price/subsidies
2. Invest in MCX commodity index. the lot size is 100 barrels and due to low margin requirements and leverage of Futures market, I could gain from an effective multi option/futures strategy. However they don’t have contracts with long term expiry and 90 days is too little a time for me. Also either party or the exchange could force a physical delivery or cancel the contract if they suspect speculative trading. WHAT AM I GOING TO DO WITH 100 Barrels, 12,000 Liter of crude oil?
3. CMX or the London commodity exchange. the lot size their is 1000 barrels. So it is an exposure of good $40,000/- USD per contract. Even after 10 years of experience, I don’t have that kind of gamble around money.
4. Hence I am left with the last option of opening and tdameritrade account and invest in blue chip oil companies that stand to gain tremendously with my opportunistic buy low and sell high strategy.
Couple of issues:
1. Account opening needs ITIN/SSN number which I don’t have. Also the account could get frozen and undergo tedious litigation if the documentation is not proper. I always fear the unknown beast.
2. If the Dollar loses its value, I stand to pay taxes on my US dollar gains but might not get any credit on my currency exchange losses. Also due to small sums and the generous dividends paid by the oil companies. I need to manage cash-flows and taxes on this multi year strategy.
3. I need to find a good instrument to back on. Look at the PE ratios and the not so significant difference between the 52 week high and today’s price. How can a commodity company whose unit sale price dipped by 60% without any offsetting increase in volume still command a double digit PE ratio? This is when the PE ratio is for last year and does not reflect the future profitability?

Name Last price Mkt cap 52wk high 52wk low EPS P/E
Royal Dutch Shell plc… 64.34 202.05B 88.13 62.11 5.09 12.64
Schlumberger Limited. 78.05 100.43B 118.76 76.73 5.32 14.66
Halliburton Company 38.54 32.66B 74.33 37.21 3.88 9.94
SEB Brent Crude Oil… 70.98 173.21 74.51
Baker Hughes Incorporate… 55.09 23.83B 75.64 47.51 2.96 18.61
BP plc (ADR) 36.05 109.61B 53.4825 34.88 2.98 12.11
Chevron Corporation 105.88 200.16B 135.1 100.15 10.86 9.75
Exxon Mobil Corporation 90.33 382.51B 104.76 86.19 7.95 11.36
Royal Dutch Shell plc… 62.93 202.05B 83.42 60.84 5.09 12.36

BTW do read this good report on US Oil industry