It’s just perfect, that I would appear on CNBC’s halftime report for the first time in a year and a half predicting much higher oil prices, and watch today as WTI crude sinks under $90 for the first time in almost two years. But ‘fast money’ is not what I’m about and oil is in an undoubtedly bearish trend. The short term is to bank on lower prices for a time, perhaps, but for the long term – that’s not the bet I want to make.
Analysts love to come up with reasons why oil is sinking – now – while they couldn’t find reason to be short oil when it was expensive. Domestic oil production? Those targets reaching almost 9 million barrels a day are yesterday’s news, as are the projections of 10m b/d in 2016. Slackening demand is a canard, as it is not global demand that is falling, it is the RATE of INCREASE in demand that is showing some slack. We will still need 650,000 b/d of oil more in 2015 than we did in 2014, and a projected 800,000 b/d more than that in 2016.
It is, of course, the dollar trade and the race to the bottom of devaluing currencies about to be embarked upon that is ultimately the biggest pressure on oil prices. Look at any chart of the dollar against any other currency – the yen, the euro, the pound – and ask yourself a question: Are you ready, looking at that chart, to get long the dollar NOW? If you are, you’re prepared to stay short oil. If you’re not, if you think that this currency trade might be a bit overstretched - then you might want to consider that oil is getting close to it’s lows here.
Let me tell you what happens fundamentally when oil goes below $90 and stays there (remembering that most US and Canadian areas producing strongly are selling their crude at a $5-$10 dollar discount to the WTI benchmark already).
The Gulf of Mexico stops. Not the current production, but virtually every new deep-water project gets at least temporarily shelved. Russia slowly goes broke. Now, many of us would celebrate Russia under pressure, particularly now – and I might too. But, there are deeper, riskier globalized issues surrounding a self-immolating Russian economy not worth contemplating.
US marginal shale producers, playing the racing game of servicing huge exploration debt while adding production growth start to quickly lose the race. As Jeff Currie of Goldman Sachs confirmed yesterday, rigs get halted and production slows. As I see it, you’ll get a lot of cratering stocks and bond defaults and a very steep decline in US production. Forget about further M+A in the oil patch and any further job growth.
Add these production risks into the already stark production risks in Russia, Iraq, Syria, Nigeria, Libya – and a Saudi-controlled OPEC that has twice reduced their own production target and you have, I believe, just another – temporary - currency-based swoon in oil prices.
Another financially and not fundamentally based move.
This has been the story of my trading life for the last 10 years and continues to inform my investment decisions.
Stay the course. Pick your targets for strong, well-financed US E+P’s and strategically placed pipeline companies and you will ultimately be rewarded for your patience and discipline.
The pain might last some weeks yet, but cannot last for months. Ultimately, the oil that runs the world has to come from somewhere. And no one is willing to work for free.