Prospects17 Feb 2019 12:01
Following a relatively good week it seems worth looking at the reasons behind the recent sp improvement and assess how things might develop. Bill Higgs’ interview was well received here but whether it played any part in last week’s rise is hard to say. OP rose, however, and G was also due to bounce off its low point in relation to OP.
This chart extends the time comparison of G v OP backwards to cover the key period from late April 2018, when G first reached 210+ , to today. It uses Peak Brent v G as the reference point for consistency and because it seems to best reflect the underlying relationship between G’s sp and OP: https://invst.ly/a226w
The $5 gain in OP last week would ordinarily rate around 15p improvement in sp - so about half of the 27p increase we saw from 177. G was also due a bounce upwards after dropping to its lowest level vis a vis Brent and, in those circumstances, usually achieves at least a 20p uplift relative to its base level with OP. So last week’s 27p rise was not extraordinary: 35p might have been expected and may well yet happen. This could get G up to around the 211 resistance level which, as the chart shows, on past performance is the best we have seen for G relative to Brent at $67.
Could G progress further than 211? Obviously a further strengthening of OP should take it further and $70 Brent could reasonably be expected to take G to 220, with 225 an obvious line of resistance which it might naturally reach if OP goes to $73. But seasonal demand is not yet at a high point and the effects of global oversupply do not seem to have run their course. Added to which, US Shale production is likely to ramp back up as WTI gets towards $60, which will probably put a natural lid on Brent in the low - mid $70s.
From the chart we can see that last year G managed 260 to 280 with $75 Brent, but that was before apparent disappointment over G’s H1 report and plans drove the sp back to 225-230 with oil at $78. So it seems safe to say that OP alone is probably not going to take G beyond 230. That will likely depend on the long term market reaction to the plan that Bill outlined in the interview.
The interview leads one to conclude that G will remain on Malcy’s Bucket List when he updates it. He put it back last July when Pantheon dropped out of it. He was originally a fan, of course, when Nat & Tony were the big name dreamers but had to concede that the company failed to deliver to its original promise and so it was dropped for a few years. Let’s hope the rehabilitation continues.
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