Having graciously bowed out of its previous oil call, Goldman is back. Back with an awe inspiring cross-asset call. So desperate are they to present a money-making recommendation, they’ve even named the research note “Considering all options”.
It goes:
Over the past three months, there has been substantial focus on the increasing disconnect between the forward price of oil, as measured by the one-year forward, and broader energy-equity markets, as measured by large-cap integrated oil stocks and indices such as the XLE.
This broader disconnect, however, is one of several, accompanied by significant dislocations between the volatility of the underlying commodity and equities. We believe that the combination of dislocations creates cross-asset opportunities in selling near-term calls on the integrated oil equities to largely fund buying calls on longer-dated oil. Although our commodity analysts do not yet recommend going long oil, this combined trade creates a low-cost way of leveraging their general views on oil that can be summarized as continued near-term downside risk, but with risks beginning to shift to the upside by the second half of next year.
The recommendation is based on three dynamics they say.
- Integrated oil companies appear rich relative to oil prices
- Implied volatility is up dramatically on integrated oil equities
- WTI implied volatility on long-dated oil futures is near its record low vs realised volatility
In combination, these dynamics offer the opportunity to sell 3-month calls on integrated oil shares with their price at a recent high over the forward oil price and their implied volatility at unprecedented levels. This premium can then be used to help fund buying 12-month ahead calls on forward oil where implied volatility is near an all-time low vs. integrated oil equity volatility and at a record discount to realized volatility.So essentially, betting oil equities won’t recover in the next 3 months while oil will – but only in the next 12 months. As ideas go it’s not that bad providing, of course, you’re not caught out by the extreme volatility currently stalking the equity market. They alert:
It should be emphasized that our commodity analysts do not yet recommend going long oil due to the near-term downside risks. This structure, however, offers long 12-month ahead ATM WTI calls at the equivalent of c.6% of notional, provided that integrated oil shares do not rally near term.
As part of a strategy to help fund buying Dec-09 WTI calls, we like selling three-month calls on large-cap integrated oil stocks. Directionally, to the extent an upside risk exists for these assets, we believe it is least likely to materialize in the short term for these largecap integrated oil stocks (the case is strongest for the commodity to rally into 2H2009.) From a macro perspective, we expect short call positions to expire worthless, whether the broad market rallies or falls.
As for which particular integrated oil companies should you be selling calls in, they suggest staple names like BP, Total, Exxon and Chevron.
That’s all very interesting, but can you guess which oil major Citi’s European oil strategy team was recommending as one of its top vanilla picks just the other day? errr… BP. Here were their thoughts:
With strategic cards now on the table, we wait to see if operational momentum can turn into financial benefit. We look for operational momentum to become evident over next 12m in both R&M and E&P; see more visibility on growth than at peers; and believe that business model is more suited to a declining/low oil price environment than its two Euro Major peers. Catalysts: +’ve = project start-ups, Texas City ramp-up, perception of management; -’ve = on-going field outages.
Total, meanwhile, was also a sturdy ‘Hold’,
Quality of upstream portfolio, cash return to shareholders; Sanofi value; but sector proxy limits outperformance Catalysts: +ve = Major acquisiton (at right price) to re-energise investment case ; -ve = weak production delivery Risks: Project delays and cost over-runs (Angola deepwater, Canada
oil sands)
Related Links:
It’s official, Goldman capitulates on oil – FT Alphaville