With Oil Prices Down, Why Not BUY Now?

AndyP

Level 2 Member
Doesn't the current price take into account the likelihood that supply will decline in a few years?
It would partially depend on what month the futures contract is expiring in. It's not like a stock that is valued based on the future earning stream.

But if you hold a January 2018 futures contract, that would definitely be based on future fundamentals.

However, a futures contract for this February is based on more immediate supply and demand. However, it's not entirely immediate because many buyers (investment companies) will buy current contracts and take possession of the physical oil and store it. This inventory they hold and (hopefully) sell at a higher price in the future. So if the current price gets much lower than future fundamentals support, this becomes a strong proposition, investors step in and buy short-term futures, and hold the physical oil as inventory, thus increasing the price.
 

SC Trojan

Level 2 Member
Doesn't the current price take into account the likelihood that supply will decline in a few years?
In order to get more oil you will need ~$60-70 if you want to make a profit, including the cost of capital. The problem is right now people have already spent the capital and so they are willing to sell the oil as long as they cover their variable costs. At $30, in many cases right now are not even covering their fixed costs but they are holding out and hoping for the upturn to come in. If things stay low for too long they will throw in the towel, lay off their workers and shut down operations.

To me the $64,000 question is how long does it take? I can't see it going much lower than it is today, because heavy sour crudes are discounted off WTI and Brent. For instance, Canadian raw bitumen is about $8 / BBL now, and Canadian heavy represents about 3 million barrels per day of supply. This is more than the entire world's current over-supply.
 

agrippa472

Level 2 Member
In order to get more oil you will need ~$60-70 if you want to make a profit, including the cost of capital. The problem is right now people have already spent the capital and so they are willing to sell the oil as long as they cover their variable costs. At $30, in many cases right now are not even covering their fixed costs but they are holding out and hoping for the upturn to come in. If things stay low for too long they will throw in the towel, lay off their workers and shut down operations.

To me the $64,000 question is how long does it take? I can't see it going much lower than it is today, because heavy sour crudes are discounted off WTI and Brent. For instance, Canadian raw bitumen is about $8 / BBL now, and Canadian heavy represents about 3 million barrels per day of supply. This is more than the entire world's current over-supply.
Isn't Canadian heavy not a good representation of the oil market because of its relative lack of desire among traders? I was reading something earlier today saying Canadian heavy is so cheap partly because of transportation costs.

On another note every time someone says oil won't go that much lower, it drops. Today Brent was down 5%, finally closing under $30/barrel. I would agree with you in wondering how long it'll take before the market stabilizes from all of the companies that will go through bankruptcy because their debt load is too high to sustain at $30/barrel.
 

SC Trojan

Level 2 Member
Absolutely, it's not indicative of the global crude market. It's ~20 API and 4% sulfur vs WTI and Brent which I believe are ~40 API and less than 1% sulfur.

My point is that Canadian heavy is approaching $0/BBL. In fact, when you take into account the cost of mining the bitumen and upgrading it, it may already be already there. At some point the Canadian will turn off production. That will take off supply from the global market and supply / demand will re-balance at a higher point.

I agree with you though. I keep thinking we've hit a bottom and it keeps not happening. At least this is something you can point to and say from a financial standpoint it makes sense that people will not keep running at a loss on a variable cost basis.
 

agrippa472

Level 2 Member
Okay that makes sense.

Do you think the entry of Iranian oil in the market will eventually even out a potential decrease in Canadian oil?
 

SC Trojan

Level 2 Member
Well this is just an opinion, but my thoughts are the Iranian oil is less than 1 MMBD, so it's much less volume than the Canadian Heavy. Also, I sort of feel that it's already being priced-in. With that being said, I think the day the Iranians start unloading their floating storage oil is going down further. People will over-react and start selling, driving the price lower. It really just comes down to timing, are we talking about 3 months of low prices for things to get back in order or 3 years? No one can answer that one...
 

SC Trojan

Level 2 Member
It looks like the sanctions are being lifted. Expect the oil market to react negatively over the next couple days. We may even test $20/BBL WTI.

I look at this as a buying opportunity, but definitely not for the faint of heart :cool:.
 

agrippa472

Level 2 Member
Yeah I've been playing the day trading with leveraged inverse ETFs. Made a little money so I'm happy but I definitely have not been playing everyday.
 
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