Let's take stock. August is the cruelest month -- it always has been for me at least, and I have already advised taking a step back from portfolios and give minor tweaks at most.
Oil has gotten pummeled on the back of what I thought were small inputs -- a gasoline glut sure to clear; an increase in production from Libya; an even smaller one from Canada; a promise of more oil from Iran. Yes, these are small. The current stockpiles of oil remain well into glut status here in the U.S., but current stockpiles are the "small ball" of the oil game we're playing.
We're playing "long ball" -- the pace and sustainability of a global rebalancing of the oil market. And on that game of long ball, there's a lot of good news that's appeared in August, even if it hasn't translated into a constructive oil market -- yet.
First and foremost is the continuing drop in U.S. production. Quarterly reports were a stone-cold disaster for big oil, and will only serve to tighten capex and development even more. We've seen some fairly large bankruptcies as well, including Halcon Resources (HK) , run by one of the supposedly smartest oil guys around, Floyd Wilson. And while Permian shale players are finding more reasons to squeeze future potential wells into smaller, juicier plots, the Eagle Ford -- once the basin that Mark Papa claimed would power America for 40 years -- has stopped growing. It's not that the EFS will be abandoned -- it's got 15 years of fantastic acreage left -- but the shale boom is showing its limitations in lots of places it didn't before.
And remember, $40 oil only accelerates the production slide as it puts added pressure on all producers. If we were really thinking long ball, we'd want oil to stay down here for another six months or more, destroying all but the most resilient players, which we've been diligent to isolate and invest in.
Globally, we've heard from countless analysts that oil won't rebalance until mid-2017. They're wrong, and I'll tell you why. It's because the Saudi strategy has worked to a tee, disassembling U.S. independents running amok on cheap credit and marginal acreage, and returning the swing barrel influence to OPEC heavyweights that they lost in 2013-14.
You want proof? Look at every one of those analyses -- from Goldman Sachs and Morgan Stanley to the International Energy Agency -- all of them. Each one notes that global demand won't catch up to increasing supply until mid-2017, but where do they all isolate that increasing supply? That's right, close to 3 million barrels a day in Saudi Arabia and Iran. Bingo -- OPEC controls the oil market again.
Maybe it's time we stopped calling the OPEC sheiks an incompetent bunch of fools who have abandoned global oil pricing power. Maybe this is all exactly the way they planned. The coup de grace for OPEC will be the cartelwide production drop that several OPEC members have been clamoring for that will finally be adopted by the Saudis, signaling oil's rise back above the three-digit mark.
When will that happen? It'll be when the marginal U.S. independent producers, like Halcon and dozens more, have left the scene and cannot re-emerge as prices again begin to spike. So far, we've had close to 70 U.S. oil bankruptcies. Financial bailouts and demanding bondholders have kept many of these companies pumping oil at a loss. That clock will ultimately run out, and these companies and the acreage they control will be dead as a dodo. Time is on OPEC's side and it can afford to wait for as long as it takes. But when it chooses to regain hold of global price, no one will see it coming -- except for you. It won't take another year.
I'm convinced we're still on the right track, even as oil hovers near $40. Other traders, in the midst of the August dance, are biting their fingernails and having nightmares of another oil bloodbath back to $30. I don't see it. And EOG Resources (EOG) at $84, Cimarex (XEC) at $125, Hess (HES) at $55 and Continental Resources (CLR) at $45 doesn't seem to see it either.
Back to the beach.
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