“It’s a race against time …
Barron’s Ben Levisohn proclaims —“no one knows who is winning.” (Barron’s or WSJ subscription needed to read more) May I suggest, based on this headline, I would say fear is winning and if you have read this far my use of the Barron’s headline effectively drew you into this post. If you stick around I will present a slightly less fearful point of view.
But to get back to Mr. Levisohn’s fearful assessment, he asserts, “we all know, though, everything isn’t all right.” He goes on to say that the fiscal and monetary stimulus is but a stop gap. We need to impede the virus and get back to work. If we don’t, pressure on the financial markets will continue to bring us more events like the the workings of the oil market last week.
He wrote , “We can talk all we want about how it was just one futures contract, that it was caused by technical factors due to that contract’s expiration and the lack of storage for the oil that owners of those contracts would have to take delivery of. But just think about how strange that is: If you owned oil, you had to pay someone to take it from you.”
What is amazing to me is Levisohn’s follow-up commentary below. I find it totally incredible coming from the pen of any experienced market observer. Yet, this was front page commentary and opinion from Barron’s this weekend.
“The stock market’s reaction was even stranger. Stocks fell hard for two days (S&P -5% peak to trough)*—first, ones with the most exposure to oil, then everything else—then started to bounce back. By the end of the week, the energy sector had turned positive for the week, and oil was an almost afterthought. It should be considered a warning. “When assets like oil swing wildly, we pay attention,” writes Lindsey Bell, chief investment strategist at Ally Invest.”
What’s wrong with this picture?
For one thing the set up for the crude disaster in the commodity market has been happening in plain sight for months with China in lock-down earlier in the year (the second largest oil consuming country in the world with smog-free air in Beijing), the Russo-Saudi price war and U.S. producers running at full tilt. The surplus production found its way into quickly evaporating storage capacity. OPEC, with most of the production cuts to fall on the back of the Saudis and the Russians, agreed to a 9.5 million barrel per day cut to begin May 1. This was to be no help easing the pressure on storage. I’m sure there were speculators in the oil market (with no intention of ever taking physical delivery) assuming this massive cut would push prices up. It did not. With limited storage available the April West Texas Intermediate (WTI) contact became a ‘towhomer’ (to whom do you sell it?). So if you were long one Nymex WTI April contract and not particularly interested in having 1000 barrels delivered to your front lawn, you had to find a buyer with storage. Those buyers drove a hard bargain, in some cases requiring the seller to pay as much as $40.00 per barrel to take the physical oil off their hands. The explanation of the ‘why’ for the crash and burn of WTI April seems pretty self evident
Back to my critique of Mr. Levishon and his article. I would say last week was no shock or surprise to the market nor should it have been a surprise to Ben. Oil stock prices reflected this disaster a month ago.
|Exxon Mobil (XON)||$ 30.11 (3/24)||$ 43.77|
|Chevron (CHV)||$ 51.60 (3/19)||$ 87.02|
|Apache* (APA)||$ 3.68 (4/01)||$ 10.69|
|*bill kort holding|
Last week’s oil stock and market ho-hum response to negative crude prices looks to me as though the glut is in the process of reversing itself. Remember, an OPEC 9.5 million barrel per day cut is about to begin Friday May 1. Continental Resources, Inc. (a major Bakken shale player) announced Friday that it was halting all shale production and canceling sales contracts, stating it would not sell its oil at these prices. On top of this many companies have slashed capital spending plans. This all seems to have been lost on the author of the the Barron’s article.
Will we go from surplus to shortage overnight? Of course not but the seeds are being sown. Production is being pared. Investment is being withdrawn. China is coming back on line with the rest of the world to follow … maybe slowly. but things will open up again.
This post is not about the ethics or secular role of oil and fossil fuels.
Is fossil fuel consumption good for the environment?… probably not. Can we flip a switch and do without oil and natural gas today… no. Can we do more with alternatives? … Yes. How long will the process take to displace our dependence on oil and natural gas? I don’t know. My sense is that it will take some time, maybe decades. In the meantime we are stuck with fossil fuels. Does this appear to be a long-term secular growth industry? No. It is not Amazon, Alphabet or Netflix. … It is a very cyclical, boom-bust industry and this characteristic makes the group interesting from time to time. This may be one of those times.
I also make this statement to head off a lot of commentary about the evils of big oil or the concept that the oil and gas industry is ‘a dead man walking.’ Remember before the advent of COVID-19 as a market factor world oil demand was growing at about a 1% annual clip. There are just too many people out there, newly minted middle-classes around the world, who want to live like you and me.
The purpose of this post was to give perspective & highlight bad behavior… bad media behavior
This was our Barron’s headline:
“In a Stock Market Like This, Anything Could Cause the Next Panic. Here’s What to Watch”
The story is a compendium of all the bad things that could happen in the economy and market. It leads with a scary recount of all the bad things happening to oil. Zero perspective was given to what appears now to be the general self-correcting nature of the oil industry’s problem or the fact that the oil stocks have had a huge bounce unimpeded by the plunge to negative prices in the oil futures market last week. This is very reminiscent of the kind of stories you would see at the bottom in 2009. The article was not designed to inform, which most of the main stream media try to do (unfortunately, there are some mis-steps into editorial license–opinion). It is not ‘fake news’ because it is really not news. It is opinion designed to scare and reel you in. It is a prime example of media misbehavior. Again, I make the point that the media is not your friend when it comes to charting an investment course.
What’s your take?
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