The price of oil headed lower Monday morning, following a trajectory I predicted last Thursday. But are there opportunities in the oil patch from this third retracement into the $40s? I might have found an admittedly boring one with a few tried-and-true integrated companies, particularly Royal Dutch Shell (RDS.A).
Oil is below $50 per barrel again as the kneejerk reaction to military action in Yemen subsides and the continuing reality of global supply gluts sets in. More important to the price of crude oil, and ultimately more bearish to the price of oil, as I pointed out Thursday, is Saudi Arabia's promise to staunch Iranian aspirations wherever they now appear. That means to me that military action against Iranian-sponsored Houthi rebels would also mean an even more concerted effort to strangle Iran economically through oil supply. With their moves in Yemen, the Saudis are signaling that oil will continue to be pumped and any thought of a production cut is way off the "to-do" list in the short term.
The Saudis further achieved that goal with an admission on Sunday's U.S. news shows that a deal with the Iranians on their nuclear program, due Tuesday, does not appear likely, and that the Obama administration is not going to punt again with another deadline extension.
First, I wholeheartedly welcome the failure of the U.S. to come to an agreement with Iran, should that be the outcome; it's a foreign policy mistake of the most egregious, pompous and destructive kind from President Obama and Secretary of State John Kerry. The rogue state of Iran obviously desires a nuclear weapon, and it would never give up a path to achieving that capability. Its now two-year campaign of lies and misdirection has done nothing except get that program further down the road with no consequences.
Oil stocks are immediately reacting to the upside, despite a retreat in oil prices. The prospect of lifting Iranian sanctions and increasing Iranian oil barrels on the global market seems a lot less likely. The hope is that that gap ultimately will again extend an opportunity to shale players in the U.S. Maybe so, but I wouldn't count on it in the short-term.
While I still believe that shale-oil stocks of well-capitalized, well-run players such as Anadarko (APC), Cimarex (XEC), EOG Resources (EOG) and a handful of others have already seen most of the likely downside, the opportunity in the vast majority of oil stocks is yet to come, no matter where oil goes from here. So now is not the time to jump in there.
One place to mark time in the space is in integrated names such as Chevron (CVX), way down on the year, as are all the oils, but delivering very strong, unrealized positives in its downstream divisions (transport, storage and refining). While other dedicated refiners are at 52-week highs and deliver little value, the integrated names have yet to reap their own refinery rewards. Chevron, with its rock-solid 4% dividend, seems a great place to hide, in particular.
One other idea is to combine an overpriced U.S. dollar with this integrated idea and buy Shell. I'm no currency trader, but it always seems that euro parity is a magic line that always seems historically impossible to cross, no matter who is trying to devalue faster. I like the idea of banking on underappreciated downstream assets of big oil and doubling the bet on the long-term weakening of the greenback, hence, Shell's very tasty 4.7% dividend. (But check with your accountant first -- the A and B shares have different tax consequences.)
It's still not time to bet on a big oil move, so find a conservative place to hide, like Shell.
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