Publications: Notes at the Margin

Oil Equities: Penny Stocks? (December 9, 2024)

 

We take up three topics this week.

 

First, we ask whether oil equities will become penny stocks. For those unfamiliar, penny stocks trade over the counter below $5 per share and “are usually associated with small companies with a lack of liquidity, meaning there are few ready buyers in the marketplace.” We ask the question because the shares of the BP Prudhoe Bay Royalty Trust, a stock we have used as a bellwether for future oil prices, dropped below $1 per share last week after the OPEC meeting, a decline of thirty-three percent. The decrease indicates a further drop in the market’s confidence in OPEC and OPEC+.

 

The fall in product prices is our second topic. Argus Media reported last week that gasoline prices in New York had sunk to levels not seen since April 2021. Diesel and gasoil prices were also lower. The reductions warn of further pressure on crude prices.

 

Finally, we explain that oil price forecasters need to focus on money manager activity. Since January 2023, oil prices have been determined by their net long position in crude oil futures and options, not supply and demand or inventory levels. Last week, our price prediction based on the change in money manager position since January 2023 came within $0.12 per barrel of the actual December 3 WTI price. Given this observation, why would anyone bother with barrel counting?