Today on CNBC-TV Dennis Gartman indicated his prediction that the price of a barrel of crude oil will decline to $65 over the coming months. Regardless of hedges, this is bound to result in a lower share price for LINN. For some, it will present an opportunity but not for others.
Dennis Gartman, like most of the "so called analysts" on CNBC, is touting his position in the markets. He's short oil. He could be right or he could be wrong. I don't think anyone truely knows where oil prices will be in 2, 6, 12 months. That's why Hedge contracts exist, to remove the uncertainty.
If Linn pulls back, I'll be a buyer because I believe in the larger macro oil picture. 90 million barrels per day in oil production worldwide and 88 million barrels per day in demand. Oil depletion reduces the supply number by 2-3 million barrels per day per year. That's how much oil must be found, every year, just to maintain current supply levels. To put into perspective, Bakken shale oil fields, at full production which won't be reached for a few years, will be 2 million barrels per day. Not even enough to satisfy oil depletion occuring in one year.
I am willing to bet that oil prices will be higher in 10 years and between now and then the price of oil will not collapse. It will go up or down, sometimes by significant amounts, but the price will always return to the "norm", which right now is between $80-$90/barrel. I expect this norm to creap up each year and should keep up with or exceed the inflation rate.
One last thought, Europe is in recession, Asia is hoping for a soft landing, and the US is on the verge of a fiscal cliff, and WTI oil is still $86/barrel. Imagine where oil would be if Asia recovers, Europe recovers, and the nimrods in Washington solve our fiscal problems. 5 years ??
And for each Gartman there's another expert explaining why oil is going to $100. When has there ever not been a range of bearish and countervailing bullish opinion about the future of commodity prices, stock prices, the economy, and exactly what President Romney will eat at a luncheon with ex-President Obama next February?
The typical analyst's motto: Often Wrong But Never in Doubt.
$65 would take a great deal of the new American production off the market. Granted there is a chance of anything happening. But a drop to $65 was be very highly stimulative to our economy. As supply is taken off the market providing OPEC with additional market power. House of Saudi certainly is not interested in $65 oil.
Sure, the hedges make it seem that cf from current operations will cover the dist, cap ex, debt servicing and G&A; but if ng & crude prices fall, the value of any new production will be lowered. making the share price totally dependent on the interest rate environment.
I can't see any reason for that environment to be more favorable than right now.
Not a growth story in either cf/unit or in cap gains.
Think the dist will go up between now and 2016?