Here Comes Oil: May Issue of TerraJoule.us

Slide1Each issue of TerraJoule.us contains: a Main Essay, the Model Portfolio, the Data Brief, and a link to a Downloadable Podcast. Gregor Macdonald, Editor.

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While oil prices are overdue for a typical Springtime pullback, the May issue of TerraJoule.us addresses the more important point that oil is finally ready to reprice. The next advance higher will not be as dramatic as the last, which took oil out of its long, historic level below $25 a barrel and delivered us to today’s $100 level. No, this next repricing will instead be smaller in percentage terms and less volatile. That said, a move to a world of $150 oil by the year 2020 will share many of the same characteristics as the price advance which began a decade ago. The repricing should begin later this year.

OPEC spare capacity, as we have discussed previously, is not expected to improve at all in 2014. Plodding along at the low level of 2 mbpd, this means the global oil market is, definitionally speaking, tight. Meanwhile, as you are probably aware, the global supermajors have thrown in the towel on their failed attempt to extract further volumes of oil by investing enormous capital each year. We are left to wonder: from what region, from what company, from what country will fresh oil supply emerge to satisfy our call for an uptick in global demand?…Without the new, post-2008 production from the United States, the world would be muddling along at the exact same production ceiling which first appeared way, way back in 2004. Remember, only one country came to the rescue of world oil supply coming out of the circa 2000 recession, and that was Russia which poured out over 3 mbpd of new supply to world markets. That heroic supply addition kept the oil futures market in a calm state until 2005, when Russia’s supply growth finally faltered. The analogy should not be lost on us, now. For today it’s the US which is the lone contributor to global oil supply growth, thus allaying fears in the futures market and helping to keep prices restrained. The call from TerraJoule.us is that period of calm is about to end.

The TerraJoule.us Model Portfolio, which began April 1, 2013, is up +10.34% since inception, and after raising cash levels to 37% last month, is ready to start accumulating positions again, as we move through summer. Accordingly, we will make changes to the model portfolio in May.

The TerraJoule.us model portfolio is cash heavy coming into the beginning of May. Last month, we reduced the position in JXI, and closed out the positions in IXC and PXJ. We did so in anticipation not only of typical Spring weakness in Oil and Gas, but the growing concern that the supermajors (IXC) have fully entered decline, and therefore,  the growing prospect that they will spend much less on services (PXJ). This selling and trimming brought cash levels to 37% of the portfolio’s mix. Interestingly, however, energy was the one sector to escape broad equity market declines in April. We retained our position in XOP (independent oil) which had an excellent month, gaining nearly 8%.

“TerraJoule.us eBook – Here Comes Oil – May 2014” by Gregor Macdonald – Editor on Ganxy