Oil's a goner. Natural gas is a goner. The oil complex is becoming un-investible before our very eyes.
That's what this week has shown us. You take out half the supply of Saudi Arabian production and it doesn't even seem to matter.
Sure, we had a momentary blip up but that's about all it was, momentary. One look at the five-year West Texas forward curve, what you can pay for oil out three years, shows that oil barely budged. It was $50 and change before the drone attack and it went to $52 soon after. That's right, just $52.
Because of a combination of conservation, a slowing economy and the bountiful Permian, the vast West Texas oil repository that will soon take our production from 12 million to 17 million barrels of oil a day. The market can't handle that much supply which is why oil in the out years is so cheap.
The Permian oil and natural gas had been pretty much trapped, slowing the drilling process, but new pipelines for both have just been completed allowing all the production to come to market. That's a major change and it's a principal reason why we no longer see a gigantic spike when half of the Saudi production is taken out.
But there's more to it. Much more. Matt Horween, my writing partner, sent me an astounding story this morning about how San Jose, which is the tenth largest city in the United States, is banning natural gas in most new residential buildings beginning as early as next year. Reuters reports that the city has become the largest city to crack down to reduce greenhouse gases and natural gas is a methane spewer.
This news is incredibly important because it shows that the future is now for renewables. As recently as a decade ago, both the late Aubrey McClendon, an aggressive natural gas driller who ran Chesapeake Energy (CHK) , and the recently deceased T. Boone Pickens, viewed natural gas as a bridge fuel, the preferred feedstock for everything from cars and trucks to power plants.
It didn't happen. Natural gas trucks and cars haven't really caught on. Meanwhile, power companies are phasing out coal but they are reluctant to put up new natural gas plants if they can build solar or wind. That's one of the main reasons, by the way, that General Electric's (GE) power division has suffered so.
The older portfolio managers, the ones who are used to Mideast shocks fueling oil dramatically higher, are ever hopeful that the complex will come back. It's about as low relative to the stock market that it's ever been with many oil and oil service stocks well below where they were when oil traded at $26 a few years ago.
That's a sign not only about the terminal value of the dirty fossil fuel complex but also that the younger portfolio managers consider oil and gas the new coal. Despite the Saudi fires, despite a president who wants to make it so car companies get a break so they don't need to cut oil use as quickly as before, despite a pro-coal presidential policy, these stocks have become pariahs.
At Action Alerts PLUS, my charitable trust, we took a loss this week on the stock of Schlumberger (SLB) , the dean of oil service. I can't believe that we sold this stock much lower than it traded at when oil was half again what it was worth. But after the fires failed to move the forward curve, we can't expect oil companies to be aggressive long-term and that's what Schlumberger needs.
If you own oils, I would scale them back. If they didn't move after the Middle East burned, I don't know what they will do if the economy keeps slowing.
Who needs them?