CASH MCCALL BUY OIL DOWNSIDE RISK NIL UPSIDE POTENTIAL 3X
I love listening to the oil prognosticators; they are always so sure of themselves. For a contrarian investor that is music to our ears. Steve Schork is one of my favorites. He puts out his analysis in the Schork Report. Here is a link to his page. Schork is quit likable but he’s also very negative. This happens on the street. Better to be a bit negative than a moronic cheerleader. Nobody can accuse Steve of being a cheerleaders. CASH MCCALL BUY OIL DOWNSIDE RISK NIL UPSIDE POTENTIAL 3X.
Cash McCall is also buying Fracking Sand Companies and Tankers
Schork Report is influential and he does move the oil markets. Down of course. Nobody is more logical.
Most recently Steve has poured cold water on the oil bulls with one of his standard syllogisms. His latest take is that the demand for oil has never been higher. Refiners are buying but they are buying on the spot markets not locking in their low prices with futures contracts. Steve’s take is that the refiners do not see the oil prices rising so they will stay into the spot market. Oil won’t rise says Schork until refiners start buying those long contracts.
Other parts of his thesis is that OPEC can’t make an effective cut in oil production with IRAN ready to fill the market. Meanwhile Saudi continues to complain about US Shale production volumes which are rising.
Schork circles the wagons by pointing out that the August peak driving season is coming to an end and refiners go into maintenance in September and October. Steve projects oil will drop as low as 41 near term and even 37 a barrel.
Why do we see it differently?
Our view is that while shale production feeds the US refinery business, that spot market for WTI is local. He’s right demand is way up and the draw on reserves has been deep. That creates a future demand curve which is decidedly upward.
As for OPEC. It is in their interest and Iran’s to raise oil prices. Barring some geopolitical action that disrupts oil production Saudi and Iran have to cut production. No producers can compete with the low cost of shale. At $45 a barrel Saudi and Iran lose money. Saudi was losing its shirt trying to stop US Shale production and they failed. They were on a trajectory to go broke. Saudi fired their former oil minister and they now have a new guy that has already cut production. The production cuts were not significant but oil improved a bit.
The key is that these Middle Eastern and Persian oil interests have to raise or they go broke. Russia also wants the price of oil to rise.
The price of oil can rise in a couple of ways. Significant cuts in production that can be monitored work. This is how oil soared to over $140 a barrel a few years ago.
Another way is for demand to soar. This is happening in Asia. China now buys more cars than the Untied States. India car sales are also robust. This is a long term trend. Demand for oil will continue to be robust.
There is a Tanker problem now.
Tankers have a glut of ships and new builds to meet future demand but until scrapping increases that will mean cheaper oil transportation. This invariably results in higher oil demand when shipping is cheaper. This trend is relatively long. Shipping is not expected to see price rebounds for another year. I like the tankers now because they are cheap. I am also buying fracking sand companies that have been simply tossed out with the baby’s wash water.
Frack sand is specialized sand and revenues in these operations are soaring. Earning are not soaring because these companies are trying to expand rapidly to take more market share. I like that kind of a story. I love fracking. It is the only oil producing means in which the costs continue to decline. Everything else especially deep water, the costs just go higher. When oil goes low, those expensive drillers shut down and this reduces supply and prices go higher.
Then there are the geopolitical risks:
Trump is less than stable. One minute he is threatening Chinese trade, the next he is blowing up Afghanistan. He is threatening Iran and they are toying with him in the same Tabloid way that the fat kid in North Korea does it. Trump loves the tabloids. The risk with Trump is endless. He’s petty and unpredictable. Markets can’t stand that. Each day with Trump is akin to standing on cracking ice. One minute he is some sector’s friend then the next he’s attacking. He is a vengeful little snit. Look at him Attacking Bezos and Amazon over Sales Taxes. He is angry about Merck’s Ceo Kenneth Frazier dumping Trump’s manufacturing counsel. Next Tweet Trump threatens gov. control of drug prices. Trump is a walking flame thrower.
Nobody in their right mind would think Trump has a military solution in North Korea. Kim Jong Un has the capacity to lob nukes at South Korea. Game over. Thus there a lots of false Trump geopolitical risks. This keeps oil from dropping below $45.
Then look who heads up the Dept of Energy… the “every-idiot” with hipster glasses Rick Perry.
It is quite possible that Rick Perry and Trump see eye to eye at the intellectual bottom. Look at the Keystone Pipeline. Trump has completely dropped the ball on it. Nebraska still has to approve it. Is the environment really at risk? Of course not. The State is just trying to figure out how it can get revenues off the flowing tar sand oils from Canada. Nebraska is doing the same thing it did with Obamacare… selling their vote with hardball.
Meanwhile Trump has lost battles to Methane and lost battles to reduce refinery blending regulations. Worse, Trump is a big supporter of the Crony Ethanol business. In the most basic terms there is NO US ENERGY POLICY other than government supplying more regulation to refiners and producers.
Trump policies are actually strangling US Energy development.
Trump has all but failed to reduce EPA regulation. This agency is chock full of environmental loons. These are Luddites. Their goal is to stop fossil fuels. Trump has failed to make key appointment in these departments so they run as if Obama was still in charge. Trump won’t touch the new insane MPG regulations. This simply destroys the Automobile market and thwarts energy.
Democrats largely oppose Fracking. It is banned in Maryland and New York.
Without a national energy policy, much is left in the hands of states. It gets real nutty down at the state level. But it is these kinds of shocks that Schork overlooks. This is also why Schork has not actually been effective at delivering oil price inflection points. In 2016 Schork predicted oil would drop back to 25 and remain bound in the 35 to 25 range roughly. But instead after February oil continued up for the entire year tapping 55. By any measure that’s a miss.
For an oil trader, 2016 was a great year if you bought the bottom. Schork’s report coincided perfectly with the bottom. I believe he has done it again. While logic suggest that oil will enter a slower period, Oil producers shift production on a dime these days. In 2016 Schork used the same reasoning that refineries would shut down after the peak driving season an oil would move lower toward year end. Nothing could be further from reality. In 2016 oil continued to rise right through December.
2017 has been an unusual year with oil sliding in Feburary when it normally rises for the peak driving season.
This is what I call the Trump effect. A false sense of over production was projected. Further the US Dollar was rising. The Dollar has a great deal to do with oil prices because oil is traded globally in dollars. Thus a high dollar reduces the dollar liquidity and oil sales tumble. Demand remains high but oil purchases cannot be financed in dollars due to a lack of liquidity.
Since April the dollar has fallen a bit. But with each new Trump international shock, the dollar rises.
This has caused the spot market to be the favored choice of oil buyers. Schork is 100% correct in that observation. However, it is pretty clear at this point that the bond market and the dollar are going to fall hard.
The Chinese Yuan is now a reserve currency of increasing importance. Trump has in effect weakened the perception that the US is a safe haven. His erratic diatribes make traders and currency speculators uncomfortable. This reduces liquidity. This creates deflation and steers toward recessions.
We simply feel there is enough Trump Uncertainty to keep global markets edgy for as long as Trump remains in office. He simply has not proven to be the igniter of any kind of resurgent US prosperity. The GDP remains low. Individual debt is the highest in history. Government debt is soaring. Trump doesn’t even have a budget. Government spending has accelerated under Trump which reduces the private sector liquidity.
This is a Bush Third Term on Steroids: With a guy that may be even more malleable than Bush! But certainly more unstable.
We all know where that is headed. $140 oil and a massive bust in leveraged derivatives. Instead of reducing leveraged derivatives, they have increased from 2008. Oil is in fact a currency hedge. It is much better than gold. Anyone can do without gold but nobody can do without oil.
Our projection is that oil rises toward $60 from here to the end of the year. If not then it levels at $50 resets in February and goes to $65 in early 2018. Buy oil when its cheap.