Middle East Tragedy and Energy Market Turbulence: ExxonMobil Megadeal, New Entrants, and the Importance of Physical Trading
It is impossible to contextualize the horror and tragedy of the terrorist attacks in the Middle East over the weekend. Although sanity and reason tend to normalize our moral compass, history tells us that the fabric of our being contains unsettling forces that has led to bloodshed and war over and over again for the past hundreds of years. While the impact to the energy markets pales in comparison to the overwhelming sadness of the human saga, the instability to the region will certainly create volatility to oil prices at least through the remainder of the year. Smack in the middle of this is Iran, and their 3 million barrels per day of production which may or may not be influenced by near term political jockeying, depending on how closely Iran is associated with the confrontation. In the near term, one would expect oil prices to oscillate based on any breaking news coming out of the region.
In what otherwise would have been the big story, ExxonMobil is in talks with Pioneer Natural Resources for a megadeal in the US shale oil industry on the order of $56 billion. Consolidation in the shale space might not be a bad thing, as it would provide for synergistic value creation. At the end of the day, however, a steady flow of capital will be required in the Permian to continue the domestic production growth needed to satisfy the incremental global demand that lies ahead.
In what is likely to be only one of many new entrants, it has been reported that Brevan Howard Asset Management is using $750 million in CAPEX funding to construct a team to trade commodities. In light of the eye popping profits last year from the four biggest private energy traders — Vitol, Trafigura, Mercuria and Gunvor — said to have exceeded $30 billion along with the record billions of profits in trading reported by Shell, Total and BP, it looks like everyone wants to jump into the pool before the last one gets stuck with the floating Baby Ruth bar. With all of that capital on hand, no one wants to miss when the volatility fish are biting. They want in. Like Fredo once profoundly stated, “It ain’t the way I wanted it! I can handle things. I’m smart.” Look before you leap. One might exercise caution before swimming towards the deep end of the pool. Physical trading provides a tremendous opportunity over speculative or algo trading. However, proper physical trading requires a knowledge base on tanks that is not easily acquired overnight. The good news is that The Tank Tiger can identify and locate tankage for those looking to set up a physical presence, and our service is absolutely free.
