Last WeekThe events of last week have taken time to sink in.
I think the ground tipped from trending down into $60-$80 ish WTI in the face of an increasing interest rate recession.
Back to
$90-$110+ oil for this quarter, and that or better for the foreseeable future.
Its a very big change. One that was reflected in the share price. Recent trends down have been replaced by strong trends up. Yesterday the Dow was down over 700 at times, and OBE et al were immune. Yesterady was pretty amazing - in a ugly down Friday, everyone who wanted out OBE et al were met with competing buyers.
The other important event was the liquidity problem at the short end of the US Treasury curve. The US Fed is now bumping up against how far it can raise its overnight rate, without breaking something.
The market saw this clearly, and we got the massive rally of Monday and Tuesday. However, the Fed did not appear to respond by buying short term treasuries as expected.
Instead the Fed responded by not buying short term treasuries. By the end of the week, the 2 year treasury yield was back up to its prior week high.
The Fed essentially said they were not going to lower interest rates now. They gave the impression that they will continue to raise rates - but at a much lower rate, and over a longer time period.
ie instead of 75 basis points next time, it may be 25 or 50. And sometime after that they are going to hold that rate for as long as it takes for inflation to decline - ie not reduce it anytime soon.
The market responded by reversing some of the Monday/Tuesday rally.
In otherwords, the fed did a very suble pivot. They went from a position of raising rates as fast as possible to get an inflation problem under control - to - saying they will hold rates at a high level for as long as possible to get inflation under control.
That high interest hold rate has not yet been determined, or achieved - but reading between the lines of fed speak, we are a lot closer now than it appeared two weeks ago.
This is important for OBE for three reasons.
1. We get the higher USD price for oil (thanks to OPEC's tighening)
2. We get a higher CAD price for that oil, becuase of a stronger USD as a result of the Fed's act of not buying short term treasuries.
3. The Fed is not going to be able to drive the US economy into a bad recession by raising interest rates too far. (The liquidity problem at the short term of the US treasury curve has placed a limit on the Fed's ability to raise much further)
All of this happenned last week.
It was so fast, that just like that, WTI is about $1-2 away from the upper collar limit on OBE's Oct and Nov hedges. ie if WTI goes up $1-2 more (and the exchange rate stays about where it is), then only about half of OBE's liquid production will see the benefit).
That may seem unfortunate, but what it means is just like that, OBE is already near the top management's hoped for cash flow range - ie OBE is about to exceed their internal forecasts.
The last Hedging info was provided on Sept 13 (a little less than a month ago).
At that time OCT had 10,000 BOE hedged and 5,000 BOE hedged in NOV.
They seem to limit their hedges to 10,000 BOE (total liquids are more than double that)
They have probably increased the NOV hedge to 10,000 BOE by now
Hopefully they havn't hedged anything in DEC yet - or if they have, its 5000 boe or less.
Last week could not of happenned at a better time for OBE. (they floored it, and along came a huge tail wind!)
It means they may achieve thier $225 debt threshold a week or two earlier.
It means they may start buying back shares a week or two earlier.
Let that sink in for a bit.
1. No recession induced demand destruction to worry about. (there may still be a slow down, but not enought to cause demand destruction).
2. A higher oil price thanks to OPEC
3. More Canadian dollars for every barrel sold.
4. The only demand destruction to worry about is from extremely high oil prices (selling less for more, is a good problem).