ALBUQUERQUE, N.M., Aug. 13, 2015 — Short report today, as we’re at the Albuquerque Sunport awaiting the first leg of our trip back to the Washington, D.C., area. But we do have a few moments to opine on today’s uneven market performance, a decent day as it turns out given that West Texas Intermediate crude plummeted over $1 (again) to close at $43 and change, another new low that approaches our estimated bottom of $40.
It’s hard to say if oil will drop further–as far as $30 bbl. according to some bears. But even though actual production has been dropping, there’s plenty of oil to be had, particularly in the U.S. where extraction companies are set to frack and pump whenever prices rise enough to make it feasible again. Here are a few thoughts from Yield Hunter, an excellent income-oriented site we’ve been following now for about a year:
Even with oil production now finally beginning to drop a little and crude inventories dropping prices of crude continue to fall (under $43/barrel today). I guess maybe investors realize that almost every shale producer has been drilling and not fracking–and in a heartbeat can turn up the spigot. In the Bakken alone there are over 1,000 wells awaiting fracking–but it likely that it will take $50 oil to justify the investment–likely capping gains of huge magnitudes. This is good reason to not be holding MLP upstream energy companies or their preferreds. I read an article on Seeking Alpha yesterday that advocates purchase of the convertible preferred stock of FX Energy–these $25/share preferreds are now trading at $14.39 and a current yield of 16.1%. This is tempting, but dangerous for an income investor.
Dangerous it is, as we’ve discovered to our chagrin. We’re now nearly out of our overly optimistic oil positions. On the other hand, we’re inching in to a pair of refiners, Tesoro (symbol: TSO) and an old favorite, Valero (VLO). They’ll get smacked around a bit, too, right now. But their profits and sales are likely to increase as the price at the pump drops for consumers–slowly, as usual when it’s on the way down.
Refiners and pipeline companies tend to get hit when the oil sector gets hit. It’s an irrational response, but then again, so is much of life. These sectors generally benefit when per bbl. oil prices drop, as they can sell more of their refined products when pump prices go down, encouraging drivers to fill up more often and go longer distances.
It’s the drillers and exploration companies, as well as the remaining major integrated oils that get really clobbered in an environment like this. The rest of the industry gets hit due to guilt by association. They’ll recover first when prices stabilize.
Meanwhile, we’re following another interesting story out west. This time, for a change, the villain is none other than the most dictatorial federal agency in the country, the entirely-gone-rogue EPA. The EPA, via one of its wealthy contractors, recently caused a massive, toxic spill into small creeks and rivers in the four-corners area of the American Southwest.
The toxic spill, which occurred in southwestern Colorado, has been polluting streams in that area as well as northwestern New Mexico and part of Utah, on its way to arrive in the Colorado River next. The EPA’s spin controllers are busily trying to stifle the story, but it seemed to be going viral Wednesday evening on the net, spreading from smaller sources to a major article in the Wall Street Journal.
Even maximum administration apologist the Washington Post weighed in this morning, although that paper more or less “papered over” the event.
The problem for the Feds, though, is that this spill has devastated farmers in the Navajo Nation, which is threatening to sue for damages, with wider implications for the EPA, its contractors, the Superfund, and a host of other government crony capitalist connections. None of this is directly affecting stocks yet, but we’ll keep you posted.
Right now, our flight is being called, so it’s off to D.C. via Denver. We’ll try to get online again Friday, but, as we get in late, who knows. In the meantime, stay mostly in cash and keep your powder dry. It looks like we’re in at least a bear market phase right now, so best to stand clear until the big bears have their way with things.