The tug of war continues between the oil bulls and the bears. Volatility continues in the price of oil which was up 6% on Tuesday and was down more than 4% on Wednesday after the Energy Information Agency (EIA) reported an inventory build of 19.95 million barrels (14 year high). This far exceeded the Thomson Reuters estimate of 3.43 million barrels.
The takeover of BG Group by Royal Dutch Shell poses the question whether the oil market has hit a bottom? The oil bulls believe that the halving in the price of crude is similar to the early 2000s when many super-mergers took place. Back then, BP acquired rival Amoco and Arco, Exxon bought Mobil and Chevron merged with Texaco.
The BG acquisition will provide Shell with enhanced positions in competitive new oil and gas projects, in Australia LNG and Brazil deep water. The other interesting point about this deal is the nearly total absence of North American assets. Shell has multiple reasons for buying BG, but more access to North America, is clearly not among them.
What I find fascinating is that 78% of BG Group’s reserves are in natural gas. Another curious fact, Shell has estimated the cost of its proposed LNG export terminal in Kitimat to be up to $40 billion (Canadian). It owns 50% of LNG Canada through its subsidiary Shell Canada Energy.
Paying a 50% premium for BG raises three more questions:
- Is the BG takeover based on the current low price of natural gas or oil?
- Is it cheaper to buy existing LNG plants than to build new ones?
- Is it cheaper to buy existing deep water wells than to drill new ones?
Wild cards in the oil market:
- When will Iran’s 30 million barrels stored in oil tankers hit the world market?
- When will oil storage in the U.S. reach capacity?
- How much of China’s cruel oil imports are going into storage?
- When will low oil prices force U.S. share production to actually decline?
- When will the Saudis cut production?
The price of oil has been stuck in a trading range but the current tug of war is slanting towards the bull side. According to oil experts, being interview in the business media, the hot money is flowing into oil stocks. The year to date price chart of the U.S. oil ETF (XLE) has moved above its 50 and 100 day moving average.
I am not an expert when it comes to analysing chart patterns. I do know that the daily trading volumes are on the weak side. I have seen many money managers on business networks indicate that they dipping their toes into oil stocks. They are reluctant to call a bottom but they are buying some large integrated oil stocks and refineries.
The XLE has 28% of its value composed of Exxon and Chevron shares. Both of these companies report their earnings on April 30th along with Royal Dutch Shell. BP earnings come out two days earlier on April 28th and I have mention in a previous post that I own some bearish BP puts in my play money account. By the way, the BP puts are currently under water but it is money that I can afford to lose.
Remember, trading in the oil market is being dominated by hedge funds with very deep pockets.