We added a long position in Oil yesterday in the Hedgeye Portfolio. The commodity was providing us with a strong green buy signal and from a fundamental perspective the ~$70 price per barrel is also at, or near, an important level for some of the major producers around the world. Fortuitously, the initiation of our long Oil position was met with comments from the Qatari Oil Minister overnight that OPEC needs to cut production by 1MM barrels of oil a day or more, so Oil is trading up close to 5% this morning.
According to PFC Energy, the breakeven point is for many members of OPEC is just below $70. The higher cost producers break even points are as follows: Saudi Arabia’s break-even point is $49, Venezuela’s is $58, Nigeria’s is $65. While the OPEC producers break-even at prices below $70, the price is obviously perilously close to levels where the higher cost producers do not break even, so it is a line that is need of protection.
More important than OPEC, as it relates to $70 oil, is Russia. According to the Russian Finance Ministry, the nation’s budget for 2009 breaks even at a price of $70 oil per barrel. Per the International Energy Agency, Russia was the world’s largest producer of crude oil in 2007 (at 12.4% of the world’s total) and the second largest exporter, just behind Saudi Arabia. As a result, this price of $70 becomes a very important number to watch.
The French constructed the “Maginot Line”, which was a long line of concrete fortifications, tank obstacles, and machine gun posts along its border, in the run up to World War II. The concept was based on the success of static trench like warfare during World War I, which enabled the French, generally, to impede German progress. Ultimately, the antiquated defense measures of the Maginot line were limited in their ability to hold back German troops and France, as we know, was conquered by the Germans.
One has to wonder how long the antiquated defense of production cuts will enable OPEC to hold the current attack on Oil’s Maginot Line.
The “Trend” in oil is negative. Buying oil is for a “Trade”. KM’s lines for oil prices are:
Buy “Trade” = $68.94/barrel
Sell “Trade” = $81.85/barrel
Daryl G. Jones
(chart courtesy of stockcharts.com)