WASHINGTON, December 1, 2014 – Over the Thanksgiving holiday weekend, most Americans traveling by car founded prices at the pump a true wonder to behold. Now well below $3 in most jurisdictions across the U.S., the price drop almost instantly puts more money in the pockets of salary-starved working Americans.
But for oil companies and investors in their shares, the rapid November price-at-the-pump drops have been nothing but bad news. Oil stocks plunged sharply in October before staging a decent recovery. But late last week, the formalization of Saudi and OPEC overproduction walloped big oil and little wildcatters alike.
The reason: Whereas not so long ago, our brilliant intellectual elites were issuing dire warnings about “peak oil” and coming shortages, the world is now apparently drowning in oil, courtesy of U.S. shale deposits being extracted with ever more precision and volume in this country—and with zero help from Washington’s idiot politicians, thank you.
Hence, the welcome and frankly belated drop in prices at the pump. Supply and demand still works, apparently, faux economists like Krugman et. al. to the contrary. But again, the flip side is a massive drop in the price of now-overabundant and definitely not peak-oil crude, exacerbated by OPEC’s complete (but actually good) loss of its once dominant pricing power.
In a horrendous bout of half-day trading on Friday, major oil stocks plummeted by anywhere from 5 to nearly 10 percent on very thin trading volume, led almost certainly by HFTs dumping away on the Thursday oil price headlines.
While in sheer pointage, today’s over-all market drops don’t seem too bad, they are if you’re an investor involved in anything resembling major oil companies, wildcatters, drillers, oilfield service companies and MLPs.
Worse, in today’s trading the carnage has spread guilt-by-association far and wide, including banks, tech, and pretty much everything else except insurers and REITs, at least as of noon EST on this first day of December.
ZeroHedge labels oil’s November killing fields “the worst month for crude since Lehmann,” and that’s not far off the mark:
November’s asset performance can best be summarized in three words: oil, oil, oil. Deutsche Bank explains why:
There were some pretty big moves in markets last month with Oil clearly under the spotlight. Indeed Brent [North Sea crude oil] and WTI [West Texas Intermediate U.S. crude oil] were down 18.3% and 17.9% in November with the most recent leg lower driven by OPEC’s decision not to cut production volumes. For Brent November was the biggest one month decline since the height of the Lehman crisis in October 2008 whilst for WTI it was the worst since December 2008.
Brent and WTI are now 33% and 28% lower versus where it started the year and are now trading at their lowest level since the spring of 2010. Away from oil the month was also generally weak for commodities which coincides with the 5th consecutive monthly gains for the USD. Copper and Silver were down -6% and -4% respectively although Gold managed to find better support, only down 0.5% in November.
The real horror of the oil price drop of the last few days, at least for traders like the Maven who have at least some holdings here, is that Friday’s action likely resulted in massive margin calls while folks were out of town, out of touch, or on the road.
In the face of a nice oil price bounce this morning—WTI is up over $2 today at $68 bbl. and change—most oil stocks are continuing their Wile E. Coyote cliff dive. Due to those margin calls, oil stocks along with anything else that’s not particularly liked at the moment are being dumped in mass quantities to raise the cash to meet those calls.
Results of big margin calls on the market can be unpredictable. Oils are dropping, of course, because they’re being sold out. Commodities in general are dropping in sympathy, as the specter of deflation once again rears its ugly head.
But a company like the highly-profitable Apple (AAPL) is being clobbered too, as accounts dump high-priced stocks to raise the cash to meet the margin calls. Profitable techs are being dumped for exactly the same reason—to raise cash.
Major beneficiaries continue to be the transports, particularly the airlines which, like America’s drivers, benefit mightily from lower fuel costs.
But in general, this bout of selling won’t be over ‘til it’s over, either later Monday afternoon, or, perhaps, a bit later in the week. The situation has been made even dicier by allegedly disastrous Black Friday retail estimates. We think those numbers are largely bogus and reflect more holiday retail moving online. But the jury’s still out on this one, and sellers today aren’t taking any changes—or prisoners.
For now, the anticipated Santa Claus Rally is dead in its tracks as investors raise cash and try to figure out whether to hold or fold the rest.
Today’s trading tips
The Maven himself is in a quandary about the rapidly deflating oil stocks he picked up recently on good fundamentals. The losses are substantial, so the question is whether to just sell out since they’re already below our official “sell-by” number; or wait to see what kind of bounce we get in prices before making a final determination.
Hedging these puppies with options is a little late, given the price drop already, and the premiums for the options aren’t so hot anyway.
So today’s decision, at least for the Maven, is to dither for at least another day.
As far as anything else is concerned, many stocks look like substantial bargains today. But again, if all we’re seeing is part one of a massive retrenchment in most stocks, jumping too early might be a bad idea.
Our best conclusion: dump at least some of the oils on any significant bounce, hold off buying anything else, and get ready to hedge if we have a half-decent Monday afternoon or Tuesday morning. Playing offense is probably not a good idea today.