Weekend January 20, 2017
Big Bets at the Bottom Pay Off
Without question the most interesting story of the week was the pay-off Ares Management LP received from its doubling down at the bottom on Williams Energy. More on that in a bit, first let’s update our view of the oil market.
The longer term daily and weekly charts now provide a helpful road map, in technical terms. of what to expect in 2017. Okay, bear with me but check out our weblog at www.themarketperspective.com , for a graphic picture and more information.
We receive the most feedback on successful predictions (gee, no wonder Dennis!) so here goes for 2017. The weekly chart of West Texas Intermediate Oil Prices clearly displays what is termed an inverse head and shoulders pattern. This resembles the profile of a person upside down. At left there is an initial low, the left shoulder. The market rebounds and then sets a lower low, the head. Price rebounds yet again and then falls back to re-test the initial low area. In a successful pattern, one that resolves to the upside, price then rise to challenge the ‘neckline’ or upper resistance area. A successful break to the upside suggests the low in price has been recorded. Higher prices are on the way.
Okay let’s put the theory into practice. The left shoulder occurred in September, 2015 around $38. The head or lower low occurred in February, 2016 around $26. The right shoulder recorded a slightly higher low than the left at $40. Price has now exceeded the ‘neckline’ of $50. Prices have touched $54 in the last few weeks. Price is now settling back for a re-test of the $50 break out level. There are no guarantees of just where the next low will be; the big question is over a successful upside resolution.
Assuming a successful resolution what can we expect? Technical theory suggests we should see a move equal to the vertical distance of the bottom to top price increase from the lowest price to the neckline. That would be the distance from $25 to $50 or another $25. This suggests a price target of $50 plus $25 or $75. The whole formation has taken over a year to unfold. It seems likely we will see a challenge of this level in 2017.
So there you have it, my prediction for WTIC for 2017 is a price target of $75.
Interestingly renewable energy is only feasible when we have high oil prices. Prices of FAN and TAN, wind and solar, have been bottoming. Expect those to rise nicely if our target materializes. And, notice Rick Perry was bragging about how Texas is a wind energy capital under his leadership as Governor. So expect more of that when he is confirmed at Energy Secretary.
You may remember Clayton Williams as one of the most famous failed candidates for Texas Governor or his ride at the Texas Capitol on horseback or just being a West Texas Philanthropist. At any rate the company is still alive and now quite well thank you. The firm had rights to one of the best potential drilling site in the Permian Basin. . But deep in debt, it might have lost the property to cr3editors. Ares Management loaned Clayton Williams Energy CWEI $350 million around February 2016 (the bottom in )oil prices at a pricey 12.5% interest. Ares gained two board seats and bought warrants on two million shares A warrant is a call option to purchase at a fixed price over a future period of time.
Come July, Ares bout five million shares of $150 million and received another board seat. Next, the big shale player, EOG, purchased a property literally next door to the Williams property. Expectations for the property then soared
And the rest of the story is that CWEI has risen from $10 last February to, gulp, $148 today. Noble is buying CWEI for cash and stock. Ares bet $516 Million and won $1.7 billion. Not bad for a year’s investing.
The story here is as Warren Buffet puts it, be bold when others are fearful. Buy low, sell high, nothing else matters.
Follow Dennis at http://www.themarketperspective.com
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