Chrisoil Part 2 Geopoliticial risks to the Oil Price and Where to Invest

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Following my interview by Justin last week on advfn podcast show Thursday 8th January regarding the debate we had over whats next for crude oil. The second part of my article is on the geopolitical risks as discussed on the show.

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One of the main underestimated problems over the direction of the oil price is where is the oil being produced around the globe in unstable countries. For example if the oil price declines much further Venezuela, where there are already reports of civil unrest leading to revolution again may descend into chaos vastly reducing supply or cutting the so called 2 million glut of oil.

However right now it is in over supply from the Middle East that is the issue but whatever OPEC says that could be changing. Iraq is at full capacity with maintenance problems in the future.  This is down to ISIS in the north and political in fighting making new improved targets unlikely, resulting in lower output helped by the slump in oil reducing capex. Why go and drill in war zones with the oil price hovering around $50 a barrel ?

Of course on the flip side in the unlikely event Saudi Arabia had a revolution oil prices would spike to $150 a barrel.

If we look at Libya having the largest oil reserves in Africa was one of the main causes for the inital fall in the oil price when it came back online with a surge of 800,000 barrels of oil a day in its output. Morgan Stanley notes this has reduced since the bombing of ports by tribal militias. If the traders took out Libya we would be above $80 a barrel however the market discounts the oil being offline for more than a few months we will see based on future events.

Russia and Mexico are in talks at the moment together with OPEC on a supply cut will they pull it off for July ? Its an open question.  However what we do know is Iran sanctions are not being lifted any time soon into a US general election so the oil glut is tighter than most think.

As a contrarian investor we have to recall Morgan Stanleys notes on geo risk ” the 2m barrel surplus could disappear in no time”.  I accept the political risks are not as important as the fundermental and technical anaylsis of crude oil in Part 1 however ignore them at your peril.

So how do we benefit geo political enviroments is key together with well breakeven makes the Falklands look an idea case in the near term. For example Argentina will make its normal upset motions and you will see (LSE:RKH) Rockhopper Exploration  on every news channel together with the rig mobilisation like the past two campaigns as a result. Argentina hand waving makes excellent headlines and ensures trader attention. Or safe North Sea production plays like (LSE:IAE) Ithaca Energy with Stella forecast to come online in 2015 however expect delays.

Remember oil was $10 a barrel in 1998 well breakeven in theory was $30 those companies went up multiples justified or not the same thing happend in 2009 at $45 a barrel well breakeven $35  yet companies went up multiples. The main point is no matter what you read even in the FT emotion takes over these stocks allowing the political risks to be an asset for shareholders unlike middle eastern oil companies. I would say with the rig leaving from South Africa to the Falklands  soon now is the time to BUY.

Until the next time more ramblings from the castle can be seen @ chrisoil

http://www.chrisoil.blogspot.co.uk

 

 

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