The Oil Money Play

The Oil Money Play

by | published February 7th, 2018

The stock market freak-out hit a crescendo on Monday, with the Dow plunging nearly 1,600 points at it lows – marking the biggest intraday point drop in history.

The Dow fell 1,175.21 points or 4.6%…

The S&P 500 lost 113.17 points or 4.10%…

And the Nasdaq Composite dropped 3.78% to 6,967.53…

However, even with Wall Street stocks posting record losses over the past few days, oil prices have not suffered to the same extent.

WTI (the New York-set benchmark for crude oil futures) was down 2.5% over the same sessions, while Brent (the other and more widely used global dollar-denominated benchmark set in London) shed 3%.

Of course, two days does not a trend make.

But the relatively “less bad” performance by oil gives us some pause.

Unlike earlier bouts of investor angst, this time around, the swoon in oil wasn’t about a decline in the broader markets.

Rather, it appears to have been the other way around.

Pundits have been prophesizing of a correction of up to 10% in high-flying equities for some time.

For their part, crude prices have had a strong recent run.

Both WTI and Brent reached four-year highs on January 26.

So, a combination of profit taking and backtracking was expected.

However, the way oil has responded over much of the last two months has indicated something else may be afoot.

And my experience last week seems to confirm it.

Energy Tremors

Last week, I was in the Caribbean addressing economic meetings in Nassau and the Cayman Islands, while also taking the pulse of a regional energy investment.

In both locations, the way private investment has been restructured to address the “new reality” of the energy sector reflected a trajectory I have witnessed elsewhere.

The tremors I felt in other places like London, Paris, Frankfurt, and Abu Dhabi has reached offshore capital locations.

Put simply, there is an undercurrent forming in the energy sector that has begun to disconnect from what happens in the more general markets.

Oil remains sensitive to traditional pressures of supply and demand, the exchange rate for the dollar (since the overwhelming majority of daily transactions are still denominated in the American currency), and perceptions of geopolitical tension, among other factors.

In addition, lingering concerns over the economy will give way to worries that demand for energy may decline as industrial production struggles.

But there is nonetheless another factor that has emerged.

And this brings me back to what was clear during my trip last week, especially on Grand Cayman.

The Caribbean Money Center

For years, the Cayman Islands, having barely 62,000 residents, have been the focus of international financial flows.

Located nearly 150 miles south of Cuba and 480 miles southwest of Miami, it is the location for thousands of offshore accounts, hedge funds, insurance and reinsurance programs, along with a range of private asset holdings and special investment vehicles.

The three islands also have beautiful beaches, resorts, and (on Little Cayman) some of the most exotic and endangered wildlife on earth.

But it is its reputation as a money center that most often comes to mind when Cayman is mentioned.

The assumption that it is merely a tax haven rankles its leadership, and for good reason.

On Thursday morning, I spent some time with the Hon. Alden McLaughlin, MBE, the Cayman Premier.

His Excellency has been quite successful during his two terms in changing how much of the world sees his small territory (the Cayman Islands are still officially a U.K. Overseas Territory, although autonomous in most respects).

“We are a regulated location for funding activity. That means Cayman enforces all international banking and fiduciary standards,” he told me with a wry smile.

The fact that Cayman is no longer on anybody’s “blacklist” is a testimony to how the transformation has gone.

My interest in these talks paralleled previous discussions we have had here in Oil & Energy Investor.

It also segues between the Caribbean and the current oil pricing gyrations.

“Layered” Investments

For the past two years, I have been telling you about the rise in new forms of oil and energy investment.

These involve private funds domiciled around the world.

Instead of focusing only on investments in companies (equity and bonds), or projects (direct funding), or production (futures contracts), the developing trend emphasizes what I have termed “layered” investments.

This approach invests in multiple connected elements at the same time.

Take a quick look at the following illustration…


Simultaneous or sequenced investments are made in a much larger series of factors impacting on an energy target.

Once leveraging is taken into account, my estimates show at least $280 billion in private capital was marshaled into energy investments this way in 2017 alone.

Most of which happened in oil.

This approach differs from more traditional short plays that seek to profit from a decline in oil prices, or longer-term plays on an expected improvement in those prices, or straight investments in a company’s stock or options.

Here, the move on product futures is tied to moves on a company, its operations, debt load, assets, and derivatives/credit spreads/collateralized obligations/and other aspects.

Well, a discussion of these recent changes in private finance was a part of my briefings in Nassau and Grand Cayman.

I could tell some of the banking folks in Nassau were aware this development was underway.

But Cayman was another matter.

Some frank sidebar conversations made clear the trend I was seeing elsewhere was already in practice among private fund managers.

Hardly surprising; Cayman is a funding center well suited for such instruments.

Here is why this is important.

Oil and broader energy, in general, is becoming undergirded by more holistic uses of funding.

It is opening up novel ways to profit but also may well provide a bit more insulation from volatility than we’ve seen in the past.

That may well result in energy emerging as a better overall investment than markets as a whole.

There will still be ups and downs.

Yet an integrative investment approach by big private money may provide a more secure base lessening downside moving forward.



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  1. Croxy
    February 8th, 2018 at 02:10 | #1

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  2. February 8th, 2018 at 20:38 | #2

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  3. Leslie J. Phillips
    February 9th, 2018 at 09:32 | #3

    Kent, I have a question unrelated to this article, but I can’t be the only person in this situation and I can certainly use your advice.
    I own mineral rights on a section of land in the Permian Basin (Wolfcamp/Sprayberry formation).
    I inherited this from my father who unfortunately signed a lease with a company that holds production on all 640 acres as long as they have a producing well. The one well they have is producing only 6b/pd and they have no plans for drilling, which leaves me in a compromised situation. I have received a multitude of offers to buy my mineral rights, but because of this lease, I would receive very little for it.
    What I would prefer, of course, would be for a company to buy out the existing lease and drill on this very promising land. (I own rights on an adjacent section and it is doing quite well.)
    Can you offer any advice on how to proceed with this? I am not a young person and don’t know if just being patient with the current situation is in my best interest.
    Any advice you can provide will be much appreciated!

  4. Harvey Berger
    February 12th, 2018 at 06:25 | #4

    With all that sunshine one would think solar…They should consider contacting Mr Elon Musk.

  5. Herbert Greenway
    February 13th, 2018 at 21:34 | #5

    Should I invest in oil and gas now or will there be a reduction in their stock price? Which 2 or 3 oil companies are the best to invest in? What oil drilling and oil related companies are best, Hal, slb or ? I hear Israel may be more focused on gas investment in their area. What do you think? Exxon and Chevron are being investigated. When should I or should I invest in them? Thanks

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