From the October 2013 issue of Futures Magazine • Subscribe!

Dan Dicker: How electronic trading changed (ruined) crude oil prices

FM: How will Fed tapering affect the energy markets as well as the stock markets?

DD: Investment in the oil markets obviously had been done with cheap money. Part of what’s been driving current prices is Fed easing as it’s been driving all assets higher. The degree to when the parachute comes out and how fast has been the question about stimulus and federal money printing. That’s always the question. Right now I’m confident that cutting back from $80 billion to $45 billion is not the kind of easing that will cause oil markets to collapse. However, if it comes fast and furious with little economy catch-up with it, it [can] seize up the credit market as it did four years ago and six years ago, and we’ll have the same results — a cratering of all assets. 

FM: What about U.S. energy independence? Is it realistic?

DD: Part of the theatre of the absurd has been in U.S. energy independence, that is logical and probably is inevitable, but not in a way most people would think. The way I view it is that there’s been an incredibly insanely wasted opportunity in natural gas, and that has come thru with glee and bad judgment of all parties through the government,  environmentalists and particularly those who look to exploit it, those midcap, independent E&P companies who shall remain nameless who went on a lease spree and drilled 40 wells in every square mile in six months and flooded the marketplace, and now are forced to try and cap wells. They’ve already destroyed certain areas like the Haynesville , and they’re flaring gas in the Bakken so they can reach tight crude. It’s a travesty, it’s an outrage. In the process we’ve allowed this incredible natural resource to be mismanaged at all levels, [it’s] worthy of a book, which is why I’m writing it. 

You couldn’t make this stuff up. It’s outrageous what goes on. They literally drained  Haynesville  dry in three years when it could have lasted 40 or 50 years. And then natural  gas cratered when it went down to $1.70. The people on the land didn’t get rich, the  companies that drilled there are broke and we are not an iota closer [to being] a natural gas driven economy as opposed to a crude oil economy, which we should already be on top of. There’s not one thing you can’t do with natural gas that you can do with crude oil that’s safer, cleaner more efficient and cheaper — not one thing!

FM: We spoke with T. Boone Pickens two years ago and he was pushing natural gas for trucks but the bill got stalled in Congress.

DD: Boone’s got money on it! I don’t have a dime on it and I see how stupid it is. And he’s so right on this. I’ve talked to him; he’s had it with these guys. 

FM: Has the shale revolution become a bubble? 

DD: I believe there is. Natural gas is $3.45 a MMbtu, and crude is  $105 [a barrel]. Which one are you going to take out of the ground? That’s the bottom line. I’m going where the money is; my shareholders need money. [The] problem with natural gas has been the mismanagement of it. We’ve got to find a way to get this stuff out of the ground, like DeBeers gets diamonds out. The way the copper miners have finally figured out you shouldn’t mine everything you can, you think that’s a good idea. It’s been incredible — you would think low prices would fix everything but they’ve hurt everyone. Fair prices fix everything.

FM: How does China play into the energy market? One EIA report said they could be the world’s largest net importer by this year. We’re talking crude oil.

DD: The Chinese clearly have shown a capacity for signing whatever deal is cheapest. And it’s clear the Chinese have thrown their lot in with the sour crudes inside the Middle East crude, and the darker the better. I don’t believe while they come and spend money for Canadian assets...I believe [their] game rests with whatever pipelines are being built through Turkey and Iran. I believe ultimately that’s where their supplies will come from. Chinese have all the money, and they’re covering every base. 

FM: You’re not a big supporter of peak oil, it’s more of a psychological driver you’ve said…

DD: No doubt [oil’s] a limited resource, so that’s where you start. Meanwhile, every guesstimation to run out has turned out to be wrong and I expect it to be wrong for several decades to come, and that puts the environmentalists in a very bad spot. I shouldn’t say the environmentalists— maybe it puts us all in a bad spot. 

FM: Let’s talk the drop in WTI/Brent spread to single digits from $40.

DD: I think actually WTI went over Brent for a day. It’s about two things, and one is fundamental and the other is financial. The first thing is fundamental: WTI is worth more than Brent to any refiner. The historical premium of WTI to Brent is $3-$5. [At least] it was until 2007. When the WTI/Brent spread turned over in 2008 and 2009, it killed more of my friends than any spread I’ve ever seen because they had lived the previous 15 years where WTI was worth more than Brent. And when they saw Brent went $3-$5 over  WTI,  they thought it was the greatest gift God had ever bestowed upon them. Then when it went to $7, they doubled down,  and when it went $15 they might have taken a shot, but when it went to $23 or $26, goodbye. I didn’t see anyone who made money on that. So the fundamental rationale for WTI finally catching up with Brent despite the fact there are some transport issues makes sense, but there isn’t a refiner on the planet who wouldn’t take WTI over Brent. 

Here’s the financial side of it: There wasn’t a trader on the planet who was long the spread. I don’t think it’s over, but clearly it’s been [fading]. I had a friend who was trading at Morgan Stanley, say ‘if I ever tell you I’m trading one lot of WTI/Brent, come over and pluck my eyes out.’ It caused more pain to more professional traders than I’ve ever seen in my life. 

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