You'd think oil would be soaring on Monday on the U.S. reimposition of sanctions against Iran. You'd be wrong. To me, oil looks like it's going to roll over, maybe roll over hard -- which is totally counterintuitive, even with the President's exemptions for certain favored nations.
And I am seeing denial of this from all the major oil companies.
We just saw Exxon (XOM) , Chevron (CVX) and BP (BP) report -- and they were all excellent quarters, some of the best quarters I can recall in the oil patch. In fact, Chevron called out that its cash flow from operations was the highest it has been in nearly five years -- back when oil was at $110. With oil 45% cash flow from operations is an astounding $23.3 billion.
Exxon, similarly, delivered the highest level of cash flow from operating activities since 2014. It's investing to grow around the world -- and is increasing production like the Exxon of old.
BP, in many ways, is the most bullish and the most confident. The company, which just boosted its dividend for the first time in nearly four years, traced an overview of inventory declines worldwide and talked about how a shock, any shock -- Libya, Venezuela, Iran -- could send oil up quickly beyond expectations.
The company noted that oil prices "are pretty well underpinned above $70 for the next six month period," adding "at least we can't see anything which would majorly move" oil much lower.
And what happened?
They went down.
I get it -- and it makes me wonder if oil's headed down, and down hard. Consider the price of the stock of Schlumberger (SLB) . The world's biggest and best oil service company trades at $51 a share, which is down seven points from where its stock was at the absolute bottom in oil at $26 back at the beginning of 2016. The stock yields almost 4%. I do not know how that is possible.
Halliburton's (HAL) stock, at $34, is just six bucks from its low back then. Weatherford International (WFT) traded at around $5 when oil was less than half where it is now. The stock, meanwhile, is at a buck and change and I hear death rattles. The huge offshore driller Ensco (ESV) traded at $11 at the 2016 depths and now it is at $7. If oil were going higher, these companies would be filling orders like crazy. Nope; the opposite.
It's not just the service companies. Some very fine independents are now bouncing along at the same prices they were when oil was half the price -- including Apache (APA) and Cimarex Energy (XEC) , two companies that would be considered among the best-run in the entire industry, with big, solid U.S. holdings in oil and the surging natural gas.
It makes no sense whatsoever for three of the biggest international oil companies to be as flush as they are and as optimistic as they sound, and yet the major oil service companies to be trading as horrendously as they do every day.
One of these groups is wrong -- and I am beginning to believe it's the oil companies, not the oil service businesses, because it isn't exactly like the oil company stocks are doing all that well either. Chevron, after that remarkable quarter, is still down 8% for the year. BP's got an almost 6% yield. Exxon's regained its premium that comes from its excellent balance sheet and is "only" down 2% for the year -- and it has an outsized yield, at least for this stock, of 4%.
Now I know the usual drill, which is that when oil is in the $70s going higher, it looks like it is going to $100, and when it is in the $60s going lower, it looks like it is going to the $50s.
But, to me, these service companies are saying look out for an epic fall, one that will play havoc with prices in the very short future.
The United States is producing a ton of oil; we just hit 11 million barrels for the first time ever, a remarkable technological feat given that it isn't like we have discovered whole new fields. It's the opposite; we're just tapping old fields in Texas. We aren't even doing much new drilling in the Gulf.
There are only two nations that can bring out spare capacity in this world and we aren't one of them. Just Russia and Saudi Arabia -- and Russia is hellbent on keeping prices up.
It is entirely possible that the Saudis have ramped production to appease the U.S. after the killing of a Washington Post journalist. But let's face it, the Trump administration is not as closely affiliated with human rights as, say, the Obama regime -- unless we are talking about the squelching of dissent in China, which has become a cause celebre of Vice President Pence.
Which leads me to a simple conclusion in the wake of the sanctions: Demand for oil has to be slowing -- and slowing in a way that could lead to a break in price below where most pundits believe is possible. That's good news for the beleaguered supply chain in the U.S. and the consumers at the pump.
But it also indicates that if you are bullish on world growth, you may be making a very bad call, as bad as the one the Fed seems to be making, because a plummet in oil signals a global synchronized downturn -- and we will not be immune.