I can't blame anyone for being confused about the price of oil -- or the oil stocks -- here, given what's going on in the Straits of Hormuz. When you have a couple of Iranian speed boats pulling over a British flagged tanker -- yes, a tanker flying the flag of what was once the mightiest navy on earth -- you would expect at least a 10% increase in the price of crude... if not more.
Instead, West Texas went up a buck. It is still down $20 from the October 4 peak of last year, the double whammy moment when Jay Powell said the Fed had to overshoot and Vice President Mike Pence said it was time to go to cold war with China.
Oil simply hasn't been able to recover. And the stocks? They keep getting worse and worse.
What's going on?
First, even though 21% of the world's oil goes through this 24-mile Straits of Hormuz choke point, the market doesn't' seem to be taking this Iranian-British strife seriously. It's almost as if the Iranians are taunting and the British are saying "hey we are working on Brexit over here let us come back with a response. Give us some time, we're jammed."
Second, oil traders are simply looking at shrinking global growth and determining that until Europe starts growing and the Chinese-U.S. trade wars cease, there will not be a turn in the price of oil. There is too much supply versus global economic demand.
Third, it should be monumental that Russia and the Saudis have gotten together to restrain supply. There has never been such ironclad cooperation between these two gigantic producers. But it hasn't impacted the market, because the U.S. just keeps growing -- and being unrecognized as a supply force to be reckoned with. Both the Saudis and the Russians at various points figured if they could lower the price of oil to a certain point, say low $30s, the U.S. oil spigot would dry up.
It didn't happen. We have gone from 5.4 million barrels a day in 2005 to 12 million barrels a day, now. Scott Sheffield, the dean of oil in this country, the man who leads Pioneer Natural Resources (PXD) , says we will be up to 17 million barrels in a few years' time.
The market can't handle that. It's a cap on everything. No wonder a shrewd and solvent operator like Chip Johnson, CEO and co-founder of Carrizo Oil & Gas (CRZO) , would take $13 and change from Callon Petroleum last week, even as Carrizo's stock was at $57 a little more than four years ago. Amazingly, oil was at $57, too at that time. A good company sells out for $44 less than it was trading for with oil at the same price!
Finally, there's the holder dilemma. This industry has promised higher prices for ages. Even on the Schlumberger (SLB) call last week, management says the turn is here. Now if you genuinely believe in Schlumberger and think the stock is a buy simply because almost every line is turning up, most showing high single-digit growth and they have the dividend and the cash flow to back it -- and are strongly committed to, by the way, with the new CEO -- but no one believes. Why not?
Perhaps because there is a realization that North America is all that matters and production is growing despite a decline in the rig count. Perhaps because conservation is playing a more powerful, unseen role? Perhaps because younger portfolio managers think oil is the new coal?
No matter. I think that oil, the commodity, is perceived as being an ineluctable loser as long as trade tensions rage. If they cease, the commodity rallies. I think Schlumberger then moves up as it is down way too much. But I simply do not believe that this group can ever regain its luster.
The Carrizo transaction and the Occidental Petroleum (OXY) overpay of Anadarko (APC) could be the beginning of the so-called, long-awaited consolidation. Still, even as the setup is better, and Schlumberger does have some very positive compares coming, the real issue is credibility: Almost no one has it in the patch, and those that do are bullish on production, which, per se, may mean they are bearish on price.