It's tough to buck oil. But can we just sit back for a second and ask how oil even got back to $48 given how much oil comes on line not just from the U.S. but from everywhere else?
I have to admit that I thought oil would stop this time at $46 considering how we saw the spigot just turn on at $50. And when I say spigot I mean that most of the companies in the U.S. literally can flood the country with pent-up oil at the drop of a hat, which simply sends more oil from more overseas markets sloshing around, lowering prices.
Plus, the consolidation that is occurring right now in the oil patch in the U.S. has to be daunting the bulls and invigorating the bears. Consider the case of Concho Resources CXO, which just bought 40,000 acres in the Midland Basin from Reliance, a private company. The Midland, which is part of the Permian play, has some of the lowest costs around.
Concho, which was able to sneak in a heavily oversubscribed offering -- 10.35 million shares at $130.89, a 4% discount to where it was -- can now start drilling aggressively on the Reliance properties given that they are probably very lucrative above $40.
But you have to understand how self-fulfilling this all is. Weak-handed owners are giving up bountiful properties to oil companies such as Concho that have the heft to drill cheaply. That then extends the obvious glut. Meanwhile, my sources indicate that the Saudis at this very minute are pumping at what may be their highest rate ever. They can undercut anyone to keep market share.
So I think the move from $45 to $48 was based on quicksand and I expect it to be repealed. I still believe $39 to $40 can be the bottom because our oil companies don't make enough money there.
Either way, the idea that the stock market is hostage to an oil market that overshot to the upside might be fanciful, but today's moves indicate that the linkage survives even on a day where the market shrugs off one of the biggest single-day declines we've seen, down a buck forty-seven off of a $48.50 basis.