We’ve entered the twilight zone in oil, where rumors and financial moves in outer markets are affecting oil and the stocks we’ve accumulated, making trading these markets not only difficult, but dangerous. We’ve got to stay disciplined and focused in this tough market and stay away from some tempting, but ultimately destructive ‘opportunities’.
Oil has put together a strong four day rally, pushing Brent prices above $50 a barrel again. But we must realize where this strong response from oil has come from before we foolishly attempt to leverage that move into good opportunities in oil stocks.
First, another meeting from OPEC and non-OPEC members has been tentatively scheduled for September, to discuss another production cut. Both the Russian oil minister and Saudi sources have floated some positive outcomes might come from these discussions. Khalid Al-Falih has said the Saudis would “take any action to help the market rebalance”, and yet the Saudis have also pushed their production in August to the highest level ever – 10.9m barrels a day. This is the kind of aggressive move ahead of meetings that signals that an agreement is very unlikely, and the Saudis (as well as the Iranians) are continuing their fight for market share, instead of ready to compromise on production limits.
Don’t get me wrong – a reconstitution of OPEC as the global supply gatekeeper is very much in the cards eventually – and is the Saudi endplay to their so-far two year assault on U.S. and other non-OPEC producers. But when that cooperation and production agreement comes, it will be when the U.S. and other producers are driven completely into the dust without hope of arising again from the ashes. The bottom line is: we’re not nearly at that point yet.
Look at Chesapeake Energy (CHK), a company I put early on my list of the ‘walking dead’. It was by far the most likely large-cap name in U.S. production that I noted was likely to go bankrupt, with its debt to equity ratio of over 4000(!). I still need to see that bankruptcy in companies like Chesapeake to believe that the destruction of U.S. production is nearing its apex and oil is truly on the road to complete rebalancing. And yet today, the company announced a new $1b funding operation with Goldman Sachs and Citigroup. That, along with the recent oil rally has sent shares upwards more than 25% in the last month. The hope, of course,…