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Why Oil Is Becoming the New Gold Standard

by | published May 20th, 2013

Something very interesting just happened at the 2013 MoneyShow in Las Vegas.

The purveyors of doom and gloom were still hawking their services there. But the primary solution they all offer – a cure-all elixir for all that ails markets – was beginning to wear thin. They were lacking in the usual conviction that this one asset is the confident remedy for all investment problems. And the audience seats at these sessions were half-filled.

Indeed, gold is losing its luster.

The erstwhile commodity fix has been under pressure of late. Yet, even while most eyes have been on declining commodities – especially gold, silver, and platinum – something else has been happening.

Crude oil is emerging as a new replacement to reflect stored market value.

That is good for folks like us who invest in the energy sector, because it will provide a floor to downward pressures in prices. It will not counter all forces reducing the price of oil, but it is likely to temper such movements, allowing us some leverage.

Take a look…

The Yellow Metal’s Fall from Grace

Before 2013, the reliance upon metals as a value play during volatile trading periods has become almost a mantra. Such commodities are usually regarded as barometers for broader market moves, although the precipitous fall in pricing over the past month has called that position into question.

That fall has been considerable.

SPDR Gold Shares (NYSEArca: GLD), the most widely held gold exchange traded fund (ETF), has fallen 15.3% since April 1. Meanwhile, the equivalent for silver – the iShares Silver Trust (NYSEArca: SLV) – is down 21%. ETFS Physical Platinum Shares (NYSEArca: PPLT), the most popular platinum ETF, is the best performing of the three, but it’s still down 8.8% since April 1.

Normally, gold is regarded as the primary refuge when markets move south, with silver regarded as a distant second. Both silver and platinum are also regarded as indicators of market improvement (along with copper, a commodity I have long regarded as an “acquired taste” largely dependent these days upon Chinese industrial performance).

What has been happening recently, however, is different. GLD and SLV have declined far more than the overall market has risen. In other words, a cursory view would immediately show that what is happening is way more than the commonly perceived negative side of the “flight to security.”

That is, if gold (and to a lesser extent silver) are seen onlyas a refuge when things so sour, the reverse move of the market up should cause interest in the metal to decline.

The current slide, however, is well beyond the rise in market prices. As of open this morning the S&P has risen 6.7% since April 1, less than half the fall in GLD and only a third of SLV.

With the much announced sales of gold holdings by investors like George Soros and Warren Buffett, the largest slide in some three decades has put the metal’s position as a further market barometer in doubt.

At the same time, the price of crude oil has become a more accurate reflection of where markets are moving.

Why Oil’s the Better Market Indicator Today

West Texas Intermediate (WTI), the NYMEX benchmark futures contract crude rate, has decline less than 1% since April 1, but has risen 7.7% over the past month, better than the 5.6% improvement in the S&P.

Yet this is not translating into a similar result for Brent, the London-based benchmark comprising the other primary crude oil standards worldwide. There, the price has declined 6.6% since April 1, although rising 3.5% for the most recent month.

Now the focus between these two has fallen upon the “spread,” the difference in price. In every trading session since mid-August 2010, Brent has been priced higher than WTI. Both of the benchmarks have lower sulfur content than some 85% of the oil traded globally on a daily basis while WTI is a slightly better grade than Brent.

Nonetheless, Brent has been trading at a premium to WTI. One reason has been the glut of volume at Cushing, Okla. (the primary pipeline location in the U.S. and the place where NYMEX sets its WTI daily price). Another is the usage of Brent as a yardstick for more actual oil sales internationally than WTI.

The surplus at Cushing is now being reduced due to a reverse flow on an existing pipeline to Gulf Coast area refineries and the prospects moving forward from new transport networks. Meanwhile, Brent is experiencing added competition from new sour (i.e., higher sulfur content) crude benchmarks rates in determining trading prices.

When combined with additional American domestic oil coming on line, the spread is narrowing. As of open this morning, it stands at 8.1% of the WTI price (the better way of measuring the actual spread’s impact on the U.S. market).  It was discounted almost 23% less than three months ago.

This contraction of the spread will have some interesting benefits for energy traders moving forward and we will discuss these in an upcoming OEI. But it is also related to the matter we are considering today.

As that spread narrows, WTI becomes a more ready reflection of actual global oil prices. And as the premium returns to New York traded oil, we will also acquire a more ready indicator of crude’s rising position as a store of market value.

There are a range of interesting outcomes for the energy investor from this development. While the average investor is not about to begin trading in oil futures, there are several ETFs that would accomplish the same objective.

Using select ETFs to target individual company shares will also result in increased trading leverage.

I will have much more to say about this once the revised oil position settles.

Sincerely,

Kent

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  1. C Timm
    May 20th, 2013 at 14:18 | #1

    The national economic press has incorrectly published and assumed that Soros “sold his fund’s gold investments”. He merely reduced his holdings 12% in GLD (per filings) during the 1st Qtr. of 2013 but added to other gold ETFs and even bought call options on an ETF that was invested in smaller gold company shares. I suspect that the main motivation for his reducing by 12% his holdings in GLD was totally related to many claims that this fund did not actually own the physical gold that they were reporting they owned.

  2. A Cacciottolo
    May 20th, 2013 at 14:27 | #2

    Does your closing sentence indicate a definite(named)ETF or similar instrument that one can invest in? Thanks for your information and best regards to your and all your staff.

  3. fred
    May 20th, 2013 at 15:29 | #3

    I am surprised by confusion of Gold with Oil, which, although both commodities, are at opposite end of spectrum. Gold is a LONG TERM investment, and oil is volatile short term commodity.
    Also misinformation is fascinating, Warren Buffet has CANCELLED the sale of gold proceedings. This seems to have escaped the writer of this article.

  4. Jean X. Whitaker
    June 4th, 2013 at 08:08 | #4

    In February 2011, WTI was trading around $85/barrel while Brent was at $103/barrel. The reason that most cited for this anomaly is that Cushing had reached capacity, depressing the oil market in North America, which is centered on the WTI price. However, Brent is moving up in reaction to civil unrest in Egypt and across the Middle East. Since stockpiles at Cushing cannot be easily transported to the Gulf Coast for export, WTI crude is unable to be arbitraged in bringing the two back to parity.

  5. June 26th, 2013 at 19:21 | #5

    In February 2011, WTI was trading around $85/barrel while Brent was at $103/barrel. The reason that most cited for this anomaly is that Cushing had reached capacity, depressing the oil market in North America, which is centered on the WTI price. However, Brent is moving up in reaction to civil unrest in Egypt and across the Middle East. Since stockpiles at Cushing cannot be easily transported to the Gulf Coast for export, WTI crude is unable to be arbitraged in bringing the two back to parity.

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