Here we are at $53 a barrel oil again, facing uncertain inventories and a sense that there's no place to put the stuff.
Here we are, at a level that represents about 100% profit for so many of the Permian producers, and they will be pumping like mad.
And here we are at the level that the U.S. has so often put a lid on oil with its own futures selling.
So, what do you do if you own oil stocks? At Action Alerts PLUS charity portfolio, we have trimmed a bit into this run for one reason: the only way to get past this level is for another producer to go off the grid. Right now, despite strife in Venezuela, tough talk in Russia, Libyan tensions and the Syrian air strike, none of these is going to derail the engine of U.S. oil, which I believe will show that we pumped 100,000 more barrels a day in the month of March than we did in February.
To be an oil bull at $53 is to believe that OPEC is not only going to maintain its cuts, but is going to exceed them. The U.S. is truly the swing producer and, more important, the oil it is bringing on is immensely profitable.
Think of it like this: if you are bringing oil sands petrol to the market, you are literally losing money on every barrel at best, at these prices.
But if you are bringing on Permian oil -- and there is enough pipeline to do so -- you are making what you would have when oil was at $100 and your production costs were at $50.
So, of course there is a tremendous incentive to pump as much as you can.
The only gating factor is that there isn't enough pipe to take it to market.
It's kind of ironic. When the oil sands were booming, the hope was that Keystone would bring it to the Gulf market. But then Enbridge (ENB) made its successful workaround, and Keystone was no longer needed.
Since then, the boom has shifted to Permian, which already had the infrastructure from the great finds from years and years ago. Now, though, the volumes are so much bigger that we can't even bring it all to market.
However, there is a rush to bring on at least four pipelines that could make it happen. That's where the demand for pipe really was; the pipeline companies just didn't think about cost. They didn't realize that oil could ever be uneconomic, which is the case right now with Canadian oil sands. And they didn't ever think that Permian could be economic.
They got it backward.
Now, the one thing that has changed is that with the addition of President Trump you can bet that no pipeline will be delayed by Washington. That means we could see all of the Permian oil come to market much faster -- within a couple of years -- than people realize.
I point this out because it means that, as more oil is discovered in the Permian, more will come to the market and these prices will bring out more discoveries.
So, the bottom line is that I think this is a very difficult level for oil to power through, given the supply and demand dynamics. You would do well to let some oil stocks go, even as I would add to any pipeline position, given that the economics for pipes just keep getting better and better.
(What will move markets this quarter and how should investors position themselves ahead of time? Jim Cramer sat down with four of TheStreet's top columnists recently to get their views. Click here to listen to his latest Trading Strategies roundtable with them and read their advice for stocks, bonds, forex and gold.)