Since predicting $100 plus oil from early 2005, it looked like I was getting most things right. I had spectacular gains in most oil stocks/options. My Dec 2010 85/100 Crude Oil Calls were doing great.
I had made even more gains in Oil refiners. Valero and Tesero options had been my favourite plays. At that point I permanently turned bearish on Refiners. To me this was the easiest call in history of investing, yet no one and I mean no one saw it coming. The analysis was simple, oil production was peaking out or close to peaking out. Refinery additions were coming in fast and furious. In such an environment how could the crack-spread i.e the difference between oil products and oil rise? Yet I counted no less than 5 "top" newsletters recommending them because of the Peak Oil Thesis. A week after I sold my positions and ran my thoughts by my intellectually superior friend Greg Jeffers (we discussed the idea of long Ex and Production companies short Refiners) I wrote this for www.financialsense.com
http://www.financialsensearchive.com/fsu/editorials/lalani/2007/0531.html
The relevant portion of that article
Secondly, the reason we have not built any refineries in this country for about 30 years has a lot to do with the fact that it is an extremely expensive capital intensive process and the NIMBY syndrome.
But above and beyond that there is another reason. Right now refining capacity and crude supply are finely balanced. In 10 years refining capacity (in my opinion) will exceed oil supplies by 5-7 million barrels per day even if we do not build another refinery anywhere. I really do not see the Valeros and Teseros making record profits when all the refineries are clamoring for the same crude. So why invest?
And the end result.
I was not able to get a start date graph from the day of my article, but you can observe it clearly on the chart above.
Since May 31st 2007, XLE is virtually unchanged whereas both Valero and Tesero are down about 65% from May 2007. Mind you, XLE has a huge refining component as well. An Exploration and Production, oil only companies index ( if there was one) would have done even better in this trade.
Long term calls rarely work out this well. But I believe my long term call on Steel versus Oil will work out at least this well over next few years.
In fact the fundamentals for this call are even better than the refiner-oil stocks spread.
The idiot analysts along with the steel companies have extrapolated China and India's double digit demand growth for steel and projected it out to 2020. More importantly they have already put in the capacity for it. Similar to refiners they are facing a higher raw material cost (iron ore, energy inputs and coal), however unlike the refiners they are already producing at low 73% of world capacity and are not profitable. China's property bubble is on the verge of bursting and another year of even 3% world GDP growth could push oil prices high enough to cause a recession. Also the supply demand for Iron ore looks a lot more bullish compared to that for steel, ensuring margin pressure for the foreseeable future.
I am short X, AKS, NUE, STLD with the largest weighting in X. I am long OIH, DO, ZAR-UN.to, ENI-Un.to and RVT in equal amounts against this basket.
I am currently down 2% on this trade but I expect it will produce very rich returns in 2011-2012.
0 comments:
Post a Comment