MVO: Look at oil market fundamentals, not dollar value (NYSE: MVO)

bymuratdeniz

MV Petroleum Trust (NYSE: MVO), the “Trust”, was created in August 2006 by MV Partners, LLC, “MV Partners”.

Reserves and income

MV Partners

Remarks

MV Partners

Remarks

MV Partners

According to its filing with the SEC:

The trust will continue to exist until the latest date of (1) June 30, 2026, or (2) the time when 14.4 MMBoe have been produced from the underlying properties and sold (this amount is equivalent to 11.5 MMBoe with respect to the right of the trust of receive 80% of the net proceeds of the underlying properties in accordance with the net profit sharing).

“The trust will be dissolved before its termination if:

  • the trust sells the net profit interest; the annual cash proceeds received by the trust are less than $1 million for each of two consecutive years;
  • the holders of a majority of the outstanding Trust Units vote in favor of the dissolution; Where
  • there is judicial dissolution of the trust.

Upon dissolution, the trustee would then sell all of the assets of the trust, either by private sale or by public auction, and distribute the net proceeds of the sale to unitholders of the trust.

Performance

MVO’s total return since inception (January 2007) was 239%, including the 2022 crude oil price spike.

Return

Yahoo Finance data

However, the maximum drawdown (“MD”) was 89%. I consider the MD to be the primary measure of risk because it quantifies how much an investor could have lost from their peak valley. Investors often exit positions when losses exceed risk tolerances, thereby locking in the loss. An MD of 89% implies that the product is not suitable as a long-term investment.

Sampling

Yahoo Finance data

I recently wrote an article, VOC Energy Trust: pure play in crude oil price exposure. MVO and VOC Energy Trust (VOC), VOC are both limited trusts managed by Vess Oil. As is the case with VOC, MVO is primarily a pure play on crude oil prices.

Over the past ten years, MVO and VOC have had single-digit total returns. This compares to the S&P (SP500TR) return of 156.4%.

Return

Looking for Alpha

Dollar-oil illusion

In my article on VOCs, I covered the fundamentals of the crude oil market in terms of supply, demand, imports, exports, and inventories. Following my VOC article, a reader referred me to another article titled, The energy report: decoupling concernsdated September 28, 2022, in which the author states:

You don’t have to worry about oil fundamentals, you only have to worry about the value of the dollar and it’s a very safe way to watch the market until it’s gone. .”

There is a lot of confusion about the relationship between the value of the dollar and oil prices. The media compounds the problem by citing the change in the dollar as the reason for the change in the price of crude in the daily reports.

I had already published an article on Looking for Alpha title, The illusion of the price of crude oil in dollars, in which I wrote:

Classical economics explains how exchange rates are determined by the interconnections between interest rates, inflation, the economy, balance of payments, and expectations. Oil prices enter into this equation. The price of oil is sometimes an important factor, and other times not.”

In my article, I published the results of two trading simulations:

  • Using the dollar as a signal for the price of crude next month
  • Use the price of crude as a signal for the dollar next month.

I performed these simulations by first performing a “best-fit” regression between the trade-weighted value of the dollar (from the Federal Reserve’s “FRED” database) and the price of WTI crude oil (the next month). I then set up a trading simulation. Using the regression equation, I predicted the price of oil next month, knowing the value of the dollar this month. I was 100% short if the predicted price was lower than the current price, and vice versa. Using the dollar as a trading signal for crude oil led to a loss.

I developed another trading strategy: using the price of oil to predict the value of the dollar. As above, I developed a regression using the price of oil one month ahead to predict the value of the dollar. As above, I compared the predicted dollar value to the actual present value. If the dollar were to fall, the strategy was short and vice versa. This strategy produced a trading gain.

The trading period was from June 2014 to May 2016. I extended the period to go monthly from September 2012 to August 2022. As shown below, the dollar and WTI had quite low correlations over the period of 10 years (i.e. the r-squared in both regressions is about 38%).

Description of data

Fred

Dollar chart

Fred

Dollar against WTI

Fred

Trading WTI using the previous month’s dollar signal resulted in a loss of $99.41/bbl over the 10-year period.

WTI Trading Results

BRS

While trading the dollar using the WTI signal saw a gain of $4.39 over the same period.

Dollar trading results

BRS

Granted, both trading strategies are simplistic. However, the result of a huge loss on WTI and a modest gain on the dollar provides evidence that WTI is driving the changes in the dollar, rather than the dollar signaling the changes in WTI.

conclusion

MVO is an energy trust that is almost entirely exposed to crude oil prices. For investors who want this exposure without trading an account in the oil futures market, this is a suitable alternative. However, as stated above, it is not a suitable long term investment as it has performed too little and has been subject to an excessively large decline.

As I concluded in my VOC article, the oil market has changed since Russia invaded Ukraine in February. High oil and natural gas prices, particularly in Europe, have created major risks of economic recession. And the most recent interest rate hikes to fight inflation add to the risks. As a result, demand for oil fell and inventories adjusted along with trade flows.

However, there is an OPEC meeting on October 5, and there have been reports that Russia is backing a production cut of one million barrels per day. In August, Saudi Arabia’s energy minister hinted that a production cut might be needed to stabilize prices. Such a drop could therefore support oil prices in the short term.

As for the dollar, data and a simple trading test show that WTI is a leading indicator for the dollar, instead of the dollar being a leading indicator for WTI. And so my conclusion is not to “worry about the value of the dollar”.

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