Once again too busy to write about the blog idea I wanted to write about yesterday. Dare I say, tomorrow? Like yesterday, there is something more important to write about.
OPEC just came out with a statement that claims they will hold production at 32.5mm bbl/d which is about 1.2mm bbl/d lower than they were producing in Aug/16. Some commodity analysts I get research from have already said that oil could be in deficit in mid-2017. Who knows? Don't forget, we are talking about OPEC after all and there is sure to be just a snick of cheating in the black market.
In the meantime, oil has surged about $2/bbl or about 5% and related equities in Canada that we track/own are up 5-15%.
Two things form my view on oil/energy:
With regards to our energy exposure, we have no direct exposure in the actual Fixed Income model, small indirect exposure in the Global Equity model but we do have some good exposure in the Tactical model across some high yield bonds (some of these we consider Tactical, not Fixed Income, to be more conservative in our risk management) (one has almost doubled since we bought it) and some common stock.
And our overall energy exposure needs to be put into buckets: 1) Oil producers, 2) Nat Gas producers, 3) Oil Field Services companies and 4) Drillers (we don't own any drillers as of yet).
Our high yield energy bonds are significantly less volatile than their underlying equities. For instance, a typical Canadian Exploration and Production Energy company's stock might be up +15% today (we own one that is) while its underlying Senior Unsecured high yield bond might be up 1-2%. May not seem great for the bonds but don't forget, that knife cuts both ways too...when the stock is down 15%, the underlying bonds may only drop 1-2%. Therein lies some of the beauty of high yield bonds...we collect a pretty big coupon each day we own the bond which seriously dampens the volatility...and in some cases, you can even make a double!
Past performance is no guarantee of future performance in a portfolio or individual securities.