Weekend August 21, 2016
Crude Rises 20% from Recent Low
It’s certainly a nice move and it looks like there is some momentum behind it.
Bart Melek, Commodity Strategist at TD Securities
Our thoughts the last few weeks both her in the column and on my weblog was the continuation of a $40-$50 range for West Texas Intermediate. Crude oil prices dipped just below $40 as August trading got underway. Price climbed to $48.89 as of Thursday August 19. So one might say price is at home on the range. Now various momentum indicators are quite overbought after the two rally. So expect resistance at this $50 level. Indeed the overall stock market is down some 100 points as I write this Friday Morning so both are hitting resistance.
The price of energy shares has done quite a bit better than energy itself. The ETF for energy, XLE, is up form the February low just under $55 all the way to $71. The energy service ETF, XES, has been range bound between $16.50 and $20. Unlike energy it backed off that high and is now trading at $18.50. so optimism regarding the service sector remains muted.
OPEC has accomplished nothing but what is the news in that? Saudi Arabia is pumping at record levels. And Iran continues to frantically ship as much as 1.65 million barrels per day to Europe. The bottom line is that supply still outpaces demand. But again, note that did not stop the 20% rally which has occurred amid more supply than demand.
Optimism is bubbling up in the Permian Basin however. Parsley Energy is paying $400 million for drilling acess to some 1,672 acres in the Midland are of the Permian Basin. Concho Resources Inc. will pay $1.625 billion in a cash and stock arrangement for rights to 40,000 acres from Reliance Energy.
Parsley has been buying into the declining market. This is Parsely’s sixth deal since the collapse began in 2014. To date Parsley has spent $1.53 billion since the collapse to acquire new acreage. Parsley is financing with the sale of some seven million new shares. As well as $200 million in 6.25% notes due in 2024.
This means the Parsley is paying about $34,000 an acre. Concho is paying more at $40,000 an acre.
Concho shares are up 40% while Parsley has gained 80% this year.
Natural gas futures have fallen from the recent high of $2.90 to recover from $2.52. Thursday’s action saw a nice 2% advance to close at $2.67. Our longer term target is $3.25.