Dear Mr. Berko: I own four master limited partnerships (Linn Energy, Atlas Resource Partners, Atlas Pipeline Partners and Kinder Morgan) that have fallen 70 percent because the price of crude oil has crashed, and the prices of my three blue chip oil stocks (Chevron, Exxon Mobil and Royal Dutch Shell) have fallen 25 to 30 percent since September. Could you consult your crystal ball (if you have one) and tell me whether oil prices will go back up? If they will, when? And would you recommend that I hold my MLPs and oil stocks or sell them or add to my position? My broker is a nice 30-something kid but way out of his league. I’ve asked his opinion, but to use your expression, he’s afraid to give me the time of day unless he calls Greenwich. So he continues to repeat his firm’s “hold” recommendations. Your advice would be greatly appreciated.
— M.C., Fort Walton Beach, Fla.
Dear M.C.: John Hofmeister, who was president of Shell Oil from 2005 to 2008, attracted national attention in mid-2010, when he predicted gasoline would be selling for $5 a gallon by 2012. Hofmeister came close, as gasoline was fetching more than $4.61 at the pump in California. Now Hofmeister is making headlines again, predicting, “The next round of high prices is likely to start later this year as crude rebounds to the $80s and $90s, perhaps pushing to the $100 level by late in the year or early next.” T. Boone Pickens (who denies any relationship to Daniel) believes that within the next 12 to 18 months, oil will return to $100 a barrel. And a few other legends who know their way around the oil patch seem to share similar opinions. That’s too bad!
The enormous implosion in oil prices has left the globe awash in cheap crude. And the highly paid, brilliant oil analysts at Bank of America, Goldman Sachs, UBS, JPMorgan, etc., never saw it coming. Never in a million years did they believe that oil would trade at $40 a barrel or that there’d be excess production of between 1 million and 2 million barrels a day. Smart traders are searching for storage solutions to warehouse the overflow and competing among themselves to lease tankers that can store crude at sea. Meanwhile, shipbrokers and agents who match lessors with lessees are having a dandy time leasing very large crude carriers, or VLCCs, which can hold 2 million barrels.
A similar strategy occurred in 2008, when crude prices imploded from $146 a barrel in July to $37 by Christmastime. As prices collapsed, traders continued buying crude rather than selling it, and then they warehoused the excess and waited for prices to return. They were as right as a button; before the 2009 year had closed, crude prices were $85 to $90 a barrel, and traders had nearly doubled their money. Now the big oil traders (e.g., Koch Industries, Mercuria Energy Group, Vitol, Royal Dutch Shell, Trafigura and Gunvor Group) are doing it again. Daily tanker rates for VLCCs have doubled, to $90,000 a day, and traders are competing for land-based tanks to store their crude. Tanks in Cushing, Okla. — the largest storage hub in the U.S. — hold 36 million barrels, and share prices of Netherlands-based Royal Vopak (VOPKF), the largest storage tank operator, have risen from $36 in December to $56.30 today.
