WASHINGTON, November 28, 2014 – in a previous column, we pretty much promised not to pen another one during the holiday weekend unless—unless something big happened. And by Jove, it did. The Saudis prevailed in the latest OPEC confab by refusing to allow the kind of production cuts that would stabilize the international per barrel price of that commodity.
Why? Simple: they want to drive companies furiously drilling for American shale oil into bankruptcy, cutting supply and goosing prices back up to $100 a barrel and more so the Saudi princes can steal all your money again and send it to ISIS, or whatever the Middle East’s Murder Inc. is calling itself this month.
Drilling for shale oil is considerably more expensive than just sticking a pipe in the ground and bottling what immediately squirts out, which is all the Saudis have to do to tap their reserves. Hence, shale’s break-even price is considerably higher than the Saudis’ production costs and break-even. Ergo, getting the price of oil under, say, $70 per barrel will lead to a curtailment in shale oil drilling here, figure the wily sheiks, so let’s cut those Yankee heathen wildcatters ’til they bleed. Simple, easy. John D. Rockefeller would have understood perfectly.
The result of the Saudis’ clever machinations—delayed on Wall Street for a day due to the Thanksgiving holiday—was an eyeball-bursting decline in the major oils and anything remotely associated with the same. Most names in the oil patch today are racing our favorite market crash metaphor, that hapless Warner Brothers cartoon character Wile E. Coyote,* down to the canyon floor.
For example, the Maven’s position in Hess (HES) was eviscerated by almost 9% at one point this Friday morning. It’s still down over 7% and doesn’t show much signs of happiness, given that trading concludes at 1 p.m. EST on this semi-holiday shortened trading day.
Our position in Murphy Oil (MUR) was likewise gob-smacked, and even multi-product refiner Calumet, another of our perennial faves, is off nearly 5% which makes little sense to us, given that it will likely be little affected by the price plunge.
After all, Calumet (CLMT) can now buy product cheaper and sell it cheaper which should increase consumer demand for its gasoline and other specialty products, like asphalt which, if you’ve looked at your roads recently, is something every municipality could use a lot of at bargain prices.
But it’s like that key scene in a recent production of Shakespeare’s “Julius Caesar” we recently attended at the Folger Shakespeare Theatre. Caesar has just been assassinated on the Ides of March as predicted, and the mob is running wild looking for someone to blame.
In this short scene, they quickly encounter a hapless poet whose name happens to be Cinna, also the name of one of the assassination co-conspirators. The mob advances menacingly on the poor sap who tries to convince them, “I’m Cinna the poet, Cinna the poet.” Well, okay figures the enraged mob, “Tear him [apart] for his bad verses.” At which point they fall on the soon-to-be-ex-Cinna as the curtain falls and we move to the next scene.
That’s pretty much what’s going on in the oil patch today. Even if a stock isn’t a major producer, or is even involved in refining which very well could benefit, the mob—likely the HFTs trading on headlines—is going to tear it apart for its bad associations. It’s what happens in a thinly traded market dominated by machines, like today’s.
We’ll wait until Monday or Tuesday to see whether it will be wise to dump our oil holdings, though whatever happens, we’ll likely continue to hold CLMT whose dumping—given its nearly 10% MLP yield—would seem foolish at this point no matter what the mindless machines may say.
The good part of all this is that it’s screwing the Venezuelans, the Iranians and Czar Vladimir I as well. Their virtually bankrupt economies need all that oil money to even stay afloat. Should be interesting.
Meanwhile, the good part–unless you happen to own shares in major oil companies like the Maven–is that most Americans are getting what amounts either to the equivalent of a substantial tax cut or a big salary increase depending on the way you look at it. Actually, it’s probably really a backdoor tax increase, as, if you fill up your tank more often now, you’re paying more gas tax. On the other hand, that virtual salary increase thing sounds kinda good, since no one except the 1% has gotten a meaningful raise since 2008 anyway, right!
Happy Black Friday. We’ll see you again on Cyber Monday.
* Note on above image: Our screen capture demonstrates one of the interesting Laws of Physics, all of which exist only in the world of Warner Brothers cartoons. Having stepped off a cliff, no Warner cartoon character can actually fall until he looks down and actually perceives he’s now walking on air. Wile E. Coyote has just taken the fatal peek, and we know what happens next. So do America’s oil execs.