Read today’s Ak-Headlamp for the latest on Alaska Gasline Development Corporation management waste; no fiscal crisis solution as legislative spending continues; and, a promising Alaska North Slope shale discovery  -dh

Crude Oil Price Commentary

by

Dave Harbour

Our Mid Atlantic energy analyst today points out to us that — in just comparing crude oil prices to U.S. stock prices — black gold could be headed a third or more higher.  (Scroll down for his analysis)

Rejoice!  Maybe lawmakers won’t have to cut government spending programs after all!

“On the other hand”, as my old, ARCO lawyer friend Mark Singletary used to say, comparing crude prices to other indices looks like oil prices could remain depressed and/or volatile for the foreseeable future.

We are grateful to our anonymous friend for his homework.  If we are citizens who have learned to err on the side of conservatism, we’d best not put all of Alaska’s/Alberta’s fiscal eggs in the basket of higher crude oil forecasts until that reality actually materializes.

Until then, shouldn’t our leaders be using this price-depressed time as logical rationale for reducing spending to sustainable levels under future low price scenarios (As ISER has long suggested)?  At the same time, they could establish constitutional limits on government growth constrained to population and inflationary increases and force majeure emergencies ONLY…and saving any excess during the ‘good years’ for rainy days in constitutionally protected heritage funds, permanent funds and/or ‘rainy day’ reserve funds accessible only by supermajority votes of legislative bodies.

What novel ideas, right?     -dh

Educated Oil Price Musings On 5-26-16 of our Mid Atlantic Energy Analyst Friend

(Note: while we can, unfortunately, not reprint the charts referenced, we can rely on our friend’s analysis of them as justification for his commentary.)

Earlier this week we (reviewed) a chart that showed crude oil could rally at least into the $58-60 range. We (feature) it here for your convenience:

This is fine as it is, and the fact that the crude price is moving up one block at a time is a fairly strong indicator of tailwinds running over skepticism.

But what about other markets that typically have a fair degree of correlation with crude oil? How are they performing?

We looked at several things that have high correlations. The first is Brent Crude to the Canadian dollar.  One can see the high correlation through the drop in oil prices in 2014 through the end of 2015. Since that time, the Loonie has stalled and retreated, even as crude continues rising. Keep that in mind down to the next charts.

We also compared WTI crude to three other indices:

  • The XES (Oil Service) ETF (green), which has had the highest correlation to crude prices over the last two and five years.
  • The XLE ETF (orange), which is broad-based set of Oil & Gas stocks, heavily weighted to the Majors. It has had a high directional correlation, but without the same velocity and volatility.
  • The EEM (Emerging Markets) ETF (blue), which traditionally has had a very high correlation to the XLE..

These are all measured relative to the S&P 500 as the benchmark.

One can see the close movement between the EEM and XLE, which are also directional with crude oil, over the last two years. One can also see the strong correlation  between WTI and the Oil Service ETF. But since the beginning of 2016, some diversions have started to take place, just we saw between the Canadian Dollar (used as the inversion to the US dollar) up above.

While crude oil  (yellow) has made very great advance relative to the S&P 500 since January 1, it has left the other indices in the dust, most notably in the last two months. This is particularly true of the XES, which has , fallen way off course. In prior rallies, this tends to happen when The Market perceives that Crude Oil is reaching a top, or exceeding its rightful balancing point.  The P/E ratio of the Oil Service sector then tends to compress, at least until The Market is shown to be wrong.

What does all this Energy Analyst mumbo-jumbo mean? We tend to see these charts as evidence that there is a lot more skepticism about the rally than last year. The length of the decline has taken a toll. Our favorite position over the years has been as a contrarian to the consensus. We tend to read these charts as evidence that The vast majority of The Market has generally capitulated on higher crude oil prices, and sees the doldrums of $35-45 crude as being more the norm for the near term.

Bottom Line: Crude oil may roll over (we believe increased volatility will be the norm for some time), but it will do from a higher level.

From Daniel McDonald in the Alaska State Senate majority press office comes this roundup of energy/fiscal crisis news that we believe is relevant to our readers:

Walker ally on gas line board resigns to run for state Senate
Luke Hopkins was identified with a hastily written name card, after being appointed to the AGDC board the day before.

$200,000 in state funds spent on PR for beer festival
Nation-wide, craft brewing is on the rise, and Alaska is no exception: 3,947,554 gallons of beer were brewed in state during 2015.

U.S. Senate bill includes $1B for icebreaker
A U.S. Senate subcommittee has passed a bill that includes $1 billion to build a new polar icebreaker.
Alaska gas line board member quits for state Senate run, blaming legislative dysfunction
Six weeks after lawmakers narrowly confirmed his appointment to the board of the Alaska Gasline Development Corp., former Fairbanks borough mayor Luke Hopkins has quit…

Hopkins resigns from AGDC board to run for state Senate
Former Fairbanks borough mayor Luke Hopkins has resigned from the Alaska Gasline Development Corporation Board less than two months after he was narrowly confirmed by the Legislature…

Hopkins resigns from gas line board for Alaska Senate run
Luke Hopkins, who was narrowly confirmed to the board of the Alaska Gasline Development Corp. last month…

State briefly suspends Medicaid payments to doctors
The state of Alaska has suspended Medicaid payments to hospitals and clinics amid a continuing budget impasse in the Legislature…
Legislature resurrects bills from regular session; conference committee named on tax credits
Legislators approved a resolution May 24 to pick up where they left off, at least in regards to the bills Gov. Bill Walker put on their agenda when he called the special session.

AOGA discusses special session and fossil fuels future
Oil and gas have been the corner stone of Alaska’s economy for decades. Now with lower oil prices and production, the state’s…

To curb crime, city will tear down Town Square fountain
Anchorage Mayor Ethan Berkowitz says the city will tear down a large concrete fountain in Town Square Park as part of an effort to…

At Anchorage Assembly, cellphone tower conversation continues, top police and fire positions get a pay boost
The Anchorage Assembly decided Tuesday to continue discussions on cell phone tower regulations and voted…

Energy & Oil Prices
Crude Oil (WTI) $49.62
Brent Crude (ICE) $49.85
Natural Gas (NYMEX) $1.92
Japan LNG (JLNGIP) $7.75