Why can't our oil stocks stay up no matter what happens to the price of oil?
We've got all sorts of so-called good news about the price of oil. We have what they are calling a trade truce between China and the United States that could cause a resumption of worldwide growth on the demand side. On the supply side we have commitments from the Russians and the Saudis - odd bedfellows all - to restrict output and they had been pumping pretty heavily. We do have the wild card of Iran which has been shipping oil to those countries that didn't follow along with President Trump's decision to rebrand Iran an outlaw this morning. But anything negative for oil from Iran pumping more can and should be immediately countered by the Iranian warmongering, particularly aggressive attacks on oil tankers that normally would have sent oil up 10 bucks at a minimum.
Why can't the oil stocks catch a serious bid?
It's simple: we are producing too much to let oil stay up too long. In fact $60 is such a terrific price for companies that need to raise cash to keep drilling that the sale of futures at those prices is too bountiful to ignore. We keep a lid on oil. Our country. We should be having our own OPEC meeting made up of an organization of petroleum states with North Dakota, Colorado, Alaska, New Mexico, Louisiana and Texas presiding, with Texas being our own Saudi Arabia.
The dumb money refuses to believe it. The smart money always surfaces as a seller. At 4:45 am Exxon Mobil (XOM) was trading up $1.75. It looked like quite a day. An hour after it opened it was up about 50 cents. The pajama traders got fleeced again.
Now there are a whole lot of forces going on in our country to explain this stubborn resistance by the oil stocks to the moves we used to expect. First, we have more than doubled oil production in the last five year, taking it from a little more than five to almost 12 million barrels a day. Second, according to Scott Sheffield, the man who first predicted that doubling on Mad Money, we should be up to 17 million barrels in another five years. Or maybe more. His last appearance on Mad Money not that long ago sent a shudder through me given that Action Alerts PLUS owns some oil stocks that have been real duds, even as we were lucky enough to own Anadarko (APC) itself.
I know that Chevron (CVX) wanted to pay a great deal for Anadarko because of those Permian possibilities. But Vicki Hollub, the CEO of Occidental (OXY) seemed to be willing to pay any price to get that acreage. She must be ready to drill 10,000 wells. She will have to if she wants a payback equal to the 8% money she borrowed from the esteemed Warren Buffett who sure extracted his bond this time.
Why can't we absorb all of this oil and, instead, are exporting about 8 million barrels a day even as we import almost 10 million barrels (mismatch related to types of crude - most of our exports are non-crude oils) We have good growth in the country so shouldn't we have to import much more?
First, the technology keeps getting better and better. Our rig count is down year over year but our increase could be as much as a million barrels a day.
Second, natural gas is almost worthless so almost all new drilling is crude-related.
Third, we have gigantic conservation efforts - electricity use is down 7% year over year, and as one of my oil experts, Kyle Cooper, explains, a lot of that is because of the change in more conservation-oriented light bulbs. So even though we keep upping our export figures for natural gas to about 6 million bcf per day, up from nothing just a few years ago, we are still flaring more than we are using!
Given those circumstances it's hard to justify an investment in the group. Couple that with millennial investment managers who regard oil like coal, a dirty wasting asset, and you have stocks that even on the biggest up days for oil, can't get out of their own way.