Roger Montgomery talks oil prices with Ross Greenwood
Unlike many stock market investors, Roger Montgomery isn’t distracted by geo political concerns or freak weather conditions. Rather, he looks at sentimental reasons that impact the long-term price of oil. In this interview Roger also reveals an A1 MQR stock trading below his estimate of its Value.able intrinsic value. Listen to Podcast.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
RobertD
:
Interesting article that I came across regarding JB Hi-Fi
“Controversial Australian entrepreneur Ruslan Kogan today labeled bricks and mortar retailers like JB Hi-Fi “Apple’s b—h”, claiming that the iconic US technology giant was planning to completely shut down its third-party distribution network and go it alone with its own stores, both physical and on the internet.”
http://www.itwire.com/it-industry-news/strategy/45488-aussie-retailers-are-apples-bitch-claims-kogan
Kogan aside – he does have an interesting point if JB Hi-Fi are in fact getting 30% of their sales from Apple products. That is a significant dependence on a vendor. While I don’t hold JB Hi-Fi anymore – it would make me want to do a little more research into the validity of this.
Lloyd
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The article describes what appears to be the ravings of an embittered madman!
Ash Little
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I did not look at the article as Kogan has a vested Interest IE Kogan TV’s
Ashley Little
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Hi Lloyd,
Thanks for that,
Interesting to think that your view of peak oil within 10 years was viewed to be conservative in 2006.
Simon Anthony
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American troops recovered inside Baghdad buildings Saddam Hussein ministry’s storehouse of blueprints of Iraq oilfields along with contracts relating to oil deals with companies from France, Russia and China in March 2003. That was 8 years ago ! At the time Iraqi oil was quick and extremely cheap to extract, with current proven reserves of 115 billion barrels, however what many U.S oil multinational had hoped was that further exploration would lead to huge additional discoveries.
The facts are that Iraq only had 2300 wells for both exploration and production drilled in its history! Compare this with the state of Texas which has over 1 million wells and counting as of 2010.
Iraq has a total of 80 oil fields with only 21 of them developed.
70% of current Iraqi production comes from 3 of these 21 fields Kirkuk, and North & South Rumaila.
According to J. Michael Yeager who has worked for ExxonMobil and later on BHP Billition Petroleum estimates that in total the remaining fields could hold 200 Billion barrels in total.
This would mean that Iraqi could (using oil multinationals ) match Saudi Arabia 10 million barrels of oil per day rate of production for the next 63 years! All of it cheap to extract. This should insure that the calculations of “Global Peak oil production” may in fact still be in the future.
Lloyd
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But lets put the Iraq reserve in perspective.
The current annual global consumption is 31 billion barrels so the reserves quoted equate to a little over six years global consumption.
Moreover, they only move the USGS quoted total global oil reserves (including exploration from around 2.5 trillion to 2.7 trillion barrels.
Peak Oil occurs at roughly half global conventional oil reserve depletion, so the consequences of the reserves increase in Iraq, if it exists is inconsequential. Remember Peak Oil is about the production daily production rate not about reserves.
The depletion in oil reservoirs which occurs with production means that the global production peak equates approximately with the point at which fifty percent of the world’s conventional oil reserves are produced.
Note also that Peak Oil only applies to conventional oil reserves. It takes no account of NGL’s, unconventional oil sources (e.g. oil sands) and alternative liquid fuels such as biofuels. Finally, I should add that the USGS 2000 global oil reserve estimate is demonstrably optimistic. The real P50 (50% probability) figure is 2.1 trillion barrels. I published a paper in 2006 on this very subject. You can find it here if you are interested:
http://www.aspo-australia.org.au/general/aie-transport-fuels-future-prices-&-supply-security-risks.html
Lloyd
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PS to my previous post.
All the global production data since 2006 has confirmed the estimate of a total global conventional oil reserve around 2.1 trillion barrels. This has now been implicitly recognized by the IEA in its recent assessment that Peak (Conventional) Oil production has occurred. This represents a marked turn around in the IEA position in the last two years who prior to this time adamantly stuck to he view that there was nothing to worry about for another twenty years!
Lloyd
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Roger,
On the subject of oil prices, you note in your ValueLine article (ValueLine: Something special) published in the Eureka Report yesterday evening that this provides some further underpinning for the enthusiasm in MCE’s growth prospects.
In the article you say in connection of some peoples’ expressed concerns on the growth outlook for the business that …. “I suggest that this view might be a tad premature and my most recent estimates have the company trading at a discount of more than 18% to intrinsic value.”
In the table at the bottom of the article you quote an IV (accompanied by the footnote: Latest Intrinsic value update February 23, 2011) of $4.85/share for MCE.
The share price has traded around this quoted IV in recent weeks.
So which is correct, the statement regarding the discount to IV, or the IV quoted in the table, or are you now considering the higher end of a range of IV’s that is roughly 20% above yesterdays close?
Worthy of note is that you have the power to move markets with MCE now up 5% within the first few hours of trading after the publication of “ValueLine: Something special”….. this is a gift but also a burden!
Regards
Lloyd
Peter
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Hi Roger,
I am thinking of taking a day off work and coming along to the SMSF charity day in Sydney in mid-March. If I bring my copy of Value.Able along, will I be able to get you to autograph it?
Peter
Ilya
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With all due respect I think Rodger is missing the elephant in the room. Current oil prices and food prices are mainly driven by inflation. Money printing = inflation – pure and simple. There is no “free” stimulus – we are paying for it right now with higher prices.
If Peak Oil was such a big driver, why is the price of corn, cotton, silver, gold, copper, pork bellies and pretty much every other commodity is also moving up in lock step? Cotton just took out an all time high for example.
Politicians and news pundits are blaming the weather/climate on food prices but in fact food production is at highest levels and there is always some weather calamity that happens every year. This is not new.
China is another good one as if it didn’t exist and just suck up on us overnight, as if Chinese didn’t consume anything at all and now they have huge demand just like that!
Next they blame speculation, but where all this money coming from during one of the most severe recessions? Care to guess? The Fed and the European central banks via the stimulus. Let’s face it – inflation is here and for every new round of stimulus it will get worse.
This is the reason why most commodities are a very good value right now: their supply is limited but the printing presses are running 24/7 as we speak. You do the math…
Lloyd
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Ilya,
Hear, hear!
Its all a natural consequence of QE2, not Global Warming, not Peak Oil, both of which are real, but not for the reasons popularly enunciated and with consequences that are far different to that outlined by the popular press and most analysts.
Global warming… look to the biggest heat engine in our near universe – the Sun. Abatement under these circumstances is a naive concept. As if we can control the natural cycles of the Sun… human hubris in the extreme is at the core of the abatement argument.
Peak Oil – think conventional oil because that is all the Peak Oil hypothesis (note it does not enjoy the status of a scientific theory) applies to, but that happened years ago and takes no account increased NGL’s consequent on rising natural gas production, and the albeit higher cost, but prolific alternative sources of non-conventional liquid hydrocarbons (oil sands, biofuels, etc).
As for never ending rapid oil price rise being a consequence of Peak Oil it is total non-sequiter. It has no basis in real world behavioral economic analysis (think demand destruction, alternative fuels and changed incentives for uptake of energy efficient technologies that currently exist, let alone the incentive for rapid new developments).
One financial consequence of Peak Oil is far greater oil price volatility in response to conventional oil supply shocks, on a slowly rising price trend, but it is not the never ending nirvana of rapidly rising prices that some like Jim Rogers naively foresee.
The 2008 oil price peak of $145/barrel was demonstrably due to speculative activity over a basic demand driven rise from $15/BBL to $75/BBL that occurred in the period from 1998 to 2007. Then the speculators flooded in. NYMEX Futures Contracts traded volumes peaked in 2008 at 15- 20 times the daily physical petroleum liquids production of 85 MMB/d.
Think about this, daily NYMEX Oil Futures contracts volumes equivalent to 1.5 billion barrels per day were being traded at the peak against a physical daily production volume of 85 Million barrels per day! And people will still insist that the price was set by supply and demand (i.e. end users) rather than speculators.
I’ll check NYMEX Oil Futures Contracts volume later, but I am prepared to wager that the volume of contracts has recently spiked to a great multiple of current daily physical oil production of about 84 million barrels per day.
Message: there is considerable risk in believing that the commodity price increases, particularly in oil, is currently being driven by fundamentals alone. To indulge in this fantasy is speculation and is surprising behavior from some astute analytical minds.
Regards
Lloyd
Lloyd
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Interesting quote from CME (formerly NYMEX) in terms of the fundamentals vs speculative argument on oil price…
CHICAGO, February 23, 2011 – CME Group, the world’s leading and most diverse derivatives marketplace, today announced record total trading volume of 3,098,129 contracts across its entire complex of Energy products for trade date Tuesday, February 22.
Anyone want to take me up on the wager?
Regards
Lloyd
Mikael
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Well I am happy to challenge you about the Sun stuff. Solar activity has only a minor influence on our climate. If we are able to raise CO2 enough it will negate not only variations in solar activity but also the much stronger Milankovitch cycles. Massive releases of CO2 has happened in the past and the effect is quite interesting including death of almost all marine life below 130-140m depth along with a sealevel rise of several tens of metres. Massive global warming would actually set the planet up for a new cycle of hydrocarbon production due to burial of carbon (no oxygen in the ocean basins) derived mainly from massive algal blooms.
David Sinclair
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Although it is completely off the topic of the blog, I will add to Mikael’s comments. Solar activity is currently at the low point in its cycle, but average global temperature is at its highest since reliable records started. That could not happen if the sun was the biggest influence on global temperatures, so that particular theory is wrong. Solar activity does influence global temperature, but it is clearly not a strong enough influence to override other influences, such as the level of greenhouse gasses in the atmosphere.
David S.
Lloyd
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Agree that its completely inappropriate to debate the role of CO2 versus other factors in Global Warming.
I don’t expect a lot of people will agree with my quick summary, which has an enormous volume of evidence behind it. By the way I am not talking about the consequences of short term solar cycles, or longer term Malankovitch forcing here. The bulk of Earth’s energy comes from the sun—and so understanding its role in climate is key.
Evidence in this respect is compelling and I make that assessment as a someone with thirty years experience and a doctorate in Geophysics. However, I don’t expect the believers in the anthropogenic argument to consider the alternative.
The cause of Global Warming, aside it is folly to attribute recent food and agricultural price rises to be the result of this. Look to QE2 and its effects on speculative activity.
Regards
Lloyd
Mikael
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A PhD in Geophysics? Well that settles it I guess.
Honestly when you brag about your title there is always a risk that you are having a conversation with someone with even more relevant academic qualifications, so please don’t.
Craig
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I find it interesting that someone would describe the sun as being a minor influencer of the climate. Something as simple as the sun being overhead in summer and lower in the sky in winter can account for what, say, a 20 degree difference in temperatures between the seasons? The sun is hardly a bit player. I have no relevant qualification….. and may be wrong.
Mikael
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Yes you are wrong. The geological record strongly suggests that ice ages, for example, are driven by the configuration of the plates that make up the crust of the planet. Basically we end up with ice ages everytime we have large continents sitting on top of the poles. Last time this happened was around the Carboniferous-Permian boundary some 300 million years ago when several plates had merged into the supercontinent Gondwana with its centre located close to the South pole. Today we have Antarctica situated there and we also have a very isolated ocean basin surrounding the North pole. We will probably remain in ice age conditions (technically defined as periods when we have ice sheets present in any low lying areas and not just at high altitudes) for millions of years (we are just about to head into the next glacial period unless we manage to halt the inevitable by pumping out as much CO2 we possibly can – governments worldwide have no plan B if we manage to bring down CO2 levels). Changing climate is very much the norm for ice ages so it rather silly thinking that we humans somehow have the ability to stabilise the climate. The only thing we can do to defer the next interglacial by a few hundred or thousand years is to keep those life saving CO2 levels up. Believe me humanity is far better off in a warmer world than it is during glacial periods. Australia will once again become a much drier place than it already is and as for Candada and Scandinavia…
Mikael
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Should of course read….defer the next GLACIAL by a few hundred or thousand years…
Peter
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Way off the topic as well, but I heard a very interesting discussion on Counterpoint recently about “Peak Wood” in England during Elizabethan times. With the expansion of the British naval fleet and prolific burning of wood for heating, cooking and industry, they had got to the point where all easily accessible sources of wood had been exhausted. They had passed the point of “Peak Wood”, and access to wood was getting harder and harder. Civilisation as they knew it was going to be difficult to sustain.
It was not long after this that they started burning coal, neatly eliminating the problem of “peak wood” while simultaneously enabling massive leaps forward through new technologies (think steam).
It will be interesting to see if history repeats itself and we develop an alternative to oil.
Ilya
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It was not my intention to kick off a global warming debate here. Whatever the cause of GW, my point is that the climatic change is gradual and sever weather events happen somewhere all the time – their impacts are only temporary. If weather/climate was such a factor why do we see prices for almost all commodities you would care to name on the increase right across the board?
Inflation appears to me the most logical explanation but yet it is the one that almost completely ignored by the mainstream. I suspect because it would expose the unintended consequences of what our wise overlords are doing to the World economy with reckless money printing.
Lloyd
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LOL. The Bernank – a wise overlord?????
Look at what his predecessor did to really kick things off the tracks. The much lauded by Wall Street – Greenspan (Put). He continues a long line of incompetence at the US Fed and the financial sector has become addicted to the quick easy money fix, now manifest in QE2, which is exporting inflation to the world as the main item of US output.
Paul Volcker was the last intelligent head they had.
Ilya
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Why single out Bernanke? Sure, he is the worst culprit but EU central banks are also inflating by bailing out entire countries with printed money. Closer to home the ALP is stimulating the economy via massive expansion of government spending.
The governments world over have internalised every one of Keynesian fallacies and are acting accordingly. The deficits are good. Money printing = economic growth. Debt and consumption are better than savings and production.
What we are seeing is a massive failure of the fiat currency system and contemporary market-meddling mercantilist state. This cannot be solved by more debt, more fiat paper and yet more government intervention in the economy.
John M
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I tend to agree. Unfortunately all this creation of fiat currency out of thin air is creating a flood of monetary inflation which is a contributing factor in the current huge rise in the price of food commodities. I wonder what is causing all the unrest and uprisings in Tunisia, Egypt, Libya etc at the moment? The fiat currency cycle is spinning back around to bite its own you know what.
Now oil supply is threatened and the price of oil is surging as a result.
The fate of the world economy ‘rests on the edge of a knife’. Will the domino’s keep toppling like Roger has mentioned? Nobody knows.
“Interesting times”!
Lloyd
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Another two notes on the rise in volumes Crude Oil Futures daily traded volumes on two of the largest commodity future markets:
1) ME Group Announces Record Volume for Benchmark Light Sweet Crude Oil (WTI) Options Contracts
CHICAGO, Feb. 24, 2011 /PRNewswire/ — CME Group, the world’s leading and most diverse energy marketplace, today announced the third record volume for its global benchmark Light Sweet Crude Oil (WTI) options contracts since the beginning of 2011. On Wednesday, Feb. 23, WTI options reached a record 324,655 contracts, surpassing the previous record of 294,411 contracts set on Jan. 31, which represents a 10.3 percent increase from the prior record.
Plus this one from ICE Futures market:
2) ICE Futures Europe sets daily WTI volume record
London, 31 January 2011
IntercontinentalExchange, Inc. ( NYSE: ICE), a leading operator of global regulated futures exchanges, clearing houses and over-the-counter (OTC) markets, announced that ICE Futures Europe set an exchange-wide daily volume record of 1,492,384 contracts on 28 January. The new record surpassed by 4.4% the previous daily record of 1,429,283 contracts, which was established on 12 January 2011.
The exchange also established a new daily volume record for its West Texas Intermediate (WTI) Crude futures contract. Volume in the WTI Crude contract reached 496,165 contracts on 28 January. The previous WTI Crude daily volume record of 464,381 contracts was established on 13 April 2010.
Comment on the significance of this:
For those unaware of the fact – each traded contract is for 1,000 Barrels of crude.
On these two exchanges (CME & ICE) alone, the WTI Futures daily traded volume has risen in recent days to the equivalent of five times the volume of global daily physical oil production (of which WTI represents less than 10%). And WTI is but one crude benchmark in the world of traded crude futures. The same has happened with just about every other commodity if you care to examine the daily futures traded volumes.
When daily futures traded volumes are an order of magnitude greater than the physical production of the underlying commodity then it becomes very clear that the price is being set in financial rather than physical markets – speculators drive the price rather than the physical buyers/end users. For those who don’t believe this then ask yourself, why it was during the 2008 oil price spike that there were no queues at the gas pumps, no shortage of refined product and refiner margins collapsed? If it was driven by physical demand then a crude supply shortage would have manifested itself by the exact opposite of what happened. We are witnessing a re-run.
To quote Yogi Berra, “Its deja vu all over again.”
Rob
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Lol… oil, stocks, writers, baseballers. Fair dinkum Lloyd, what don’t you have a PhD in?
Seriously though, the level of the debate on this blog just keeps climbing.
My thoughts on oil, carbon tax and an ETS (to broaden the debate just are little) are fairly simple. Oil, like all commodities is a finite resource. At some stage supply will be an issue.
A carbon tax? Really? In the end the consumer must pay. Companies will take the path of least resistance, to sustain or increase profits. They will always either cover the cost of carbon or choose another path.
An ETS? I can see the Wall St financiers rubbing their hands together. What derivatives can they put together for the carbon bubble? If they can trade 10 to 15 times oil production in a single day (as Lloyd said) what will they do with carbon credits? Placing the future of the planet in the hands of Wall St is not a great idea.
Global warming is a futile debate. We are 6.5bn people on one small planet. If our population grows at just 1.4%pa it will double in 50 years.
We shouldn’t need an excuse to look after our planet and a carbon tax is not the way to do it.
RobertD
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As always, it was enjoyable to hear your thoughts Roger. I didn’t know you were a regular on 2GB. Will you be posting more podcasts from this show?
Ash Little
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Hi Robert/Roger
I hope you continue to post these Roger. I enjoy them very much.
Thanks again all your help.
It really has been more than a leg up for me.