One up side of oil industry infrastructure bottlenecks for refiners is that stranded domestic West Texas Intermediate sells at a steep discount to globally traded Brent crude. Even when pipelines catch up, home-produced oil may still be cheaper.TODD KOROL/Reuters
The annual Sohn Investment Conference taking place in New York is pretty much the Oscars of the hedge fund industry. A cavalcade of helicopter-commuting billionaires presenting investment ideas while being given plenty of media coverage is, if anything, even more obsequious than Oscar night.
Amid the hype, Canadian investors should take particular note of PointState Capital manager Zach Schreiber, who is betting heavily that West Texas Intermediate crude oil prices are heading "much lower."
Mr. Schreiber has an impressive CV as a protégé of "market wizard" Stanley Druckenmiller, who, in turn, learned the hedge-fund ropes from George Soros. His thesis on crude is relatively straightforward – over-production in the U.S. will create the same plunge in the commodity price that happened previously with natural gas.
Mr. Schreiber offered some patronizing sympathy for the global investors that have placed $33-billion (U.S.) worth of bets that WTI crude will continue to climb from current levels, "Now, if you're long, I'm sorry for you, but this could make you feel comfortable. At least you have friends."
Predictions of weaker North American crude prices are supported by the futures curve, which suggests that the spot price will be in the $85 per barrel range by the middle of 2015.
There are opposing views on the matter. Independent energy analyst Gregor MacDonald believes global oil prices will reach $150 per barrel by 2020. Mr. MacDonald believes that OPEC nations will be unable to increase production and, furthermore, that "today it's the U.S. which is the lone contributor to global oil supply growth, thus allaying fears in the futures market and helping to keep prices restrained. [Our call] is, that period of calm is about to end."
Who to believe? For Canadian investors, the important distinctions are between WTI and Brent crude prices and the potential huge difference between the long- and short-term outlook for the commodity's prices.
According to the Wall Street Journal, Mr. Schreiber has partially hedged his short position in WTI crude with a long position in Brent crude prices. This suggests that he is bearish on North American prices specifically, and possibly not oil prices in the rest of the world.
In terms of time horizon, it is possible that both Mr. Schrieber and Mr. MacDonald will be right. Mr. Schrieber's investment thesis is largely short term and, in light of the futures market and rapidly rising U.S. oil production, believable.
But, as Businessweek points out, reserves from the fracking process deplete extremely quickly, and the U.S. oil rush will offer only a temporary respite from global oil scarcity. When depletion occurs – the U.S. Energy Information Administration predicts production increases will end for good in 2020 – Mr. MacDonald's forecast looks supportable.
Taking both views together, there are some takeaways for Canadian investors. In the next eighteen months or so, investors should emphasize stocks selling more crude into global markets at the Brent price, as opposed to North American–focused companies.
The year 2020 seems a long way away, but investors should start planning now to take advantage of the more optimistic long-term forecast for WTI crude. If, for example, WTI spot prices do fall hard next year, patient investors can feel comfortable in adding to holdings in the sector at bargain prices.
Scott Barlow