On the Short End of a Slippery Stick
By Dan Dicker - Mar 28, 2014, 1:35 PM CDT
There’s little in the energy space that I like right now; major indexes look fairly priced and energy stocks offer even less to get excited about. US E+P has had it’s major run in 2013 and the two values I like – Anadarko (APC) and Noble (NBL) – have been quiet and need more patience. Refiners are well priced considering the curve, except perhaps for Valero (VLO), which seems overextended. Offshore drillers are off-cycle and I’m not ready to pick a bottom, yet. Natural gas at $4.40 looks steady.
But the continuing story surrounding Ukraine, which I thought would begin to quiet by now has instead unbelievably escalated. Oil prices are at risk for a major spike upwards.
Ukraine’s coup d’état was met, in my view, by a very restrained Russian reaction – securing their Black Sea port at Sevastopol and reclaiming a 90+% native population in Crimea. My thoughts were at the time that Russia would then proceed to dislodge the minority, Western-leaning ‘government’ in Kiev by slowly using their strong influence in natural gas supply through the nation – a tactic they have used successfully in Eastern Europe twice in the recent past.
Beyond what was, I suppose, a necessary token reaction of sanctions of half a dozen Kremlinites by President Obama, I expected the rest to be solved internally – and all the fears of further Russian military incursions would fade…
There’s little in the energy space that I like right now; major indexes look fairly priced and energy stocks offer even less to get excited about. US E+P has had it’s major run in 2013 and the two values I like – Anadarko (APC) and Noble (NBL) – have been quiet and need more patience. Refiners are well priced considering the curve, except perhaps for Valero (VLO), which seems overextended. Offshore drillers are off-cycle and I’m not ready to pick a bottom, yet. Natural gas at $4.40 looks steady.
But the continuing story surrounding Ukraine, which I thought would begin to quiet by now has instead unbelievably escalated. Oil prices are at risk for a major spike upwards.
Ukraine’s coup d’état was met, in my view, by a very restrained Russian reaction – securing their Black Sea port at Sevastopol and reclaiming a 90+% native population in Crimea. My thoughts were at the time that Russia would then proceed to dislodge the minority, Western-leaning ‘government’ in Kiev by slowly using their strong influence in natural gas supply through the nation – a tactic they have used successfully in Eastern Europe twice in the recent past.
Beyond what was, I suppose, a necessary token reaction of sanctions of half a dozen Kremlinites by President Obama, I expected the rest to be solved internally – and all the fears of further Russian military incursions would fade into the background (because they didn’t need it) along with the cries from Kiev for financial help – cries I expected would go unheeded.
Instead, I’ve seen a ridiculous barring of Russia from the G8, increasing sanctions from the United States and a European $18B aid package put together for the revolutionary, illegitimate Kiev leaders. From Russia, I’ve seen likewise sanctions of US Senators and a demand for owed Ukraine energy payments to be made immediately and IN GOLD, adding a treasury strain as well as a vindictive monetary twist.
Because of the energy hold that Russia has on Eastern Europe and even parts of Western Europe, Russia holds all the cards in this standoff. Besides having all the spigots to European solvency in their back pockets, they have a ready customer in China for almost whatever they choose not to send West – reports of increased contracts to the East are already hitting the energy wires.
I’ve said that only one act could really enflame this situation and I thought it an impossible option: applying sanctions on US companies doing business in Russia. I’m starting to think this option less and less impossible.
The geopolitical nature of Ukraine puts Europe and the US on the very short end of this slippery stick and what has disturbed me is that both the EU and President Obama, for differing political reasons, seem unwilling to admit it. I think they continue to want to ratchet up pressure on a Russia that holds all the cards, and restrictions on companies like Exxon (XOM) working in the Russian Arctic and with LNG projects are the one lone remaining way of doing that.
Dangerous and real new ‘cold war’ ideas are floating around. I think the best energy idea I can give right now is to buy some out of the money crude call options. All the risks seem to be again increasing to the upside.
