President Trump seems to be deceived as always by his big statements – he may not remember the mere stroke of genius in Saudi Arabia and Russia to actually shut down the US, crippling his oil shale industry. Oil prices are down 60% from the highest in February 2020, as the price is hit not only by about 25 million barrels per day in lost demand, but also by an increase of about 3 mbpd, as Saudi Arabia finally gave up on a lone player backing this market to help American slate and other players capture their lost market share.
It’s not just about slowing down the coronavirus. For the past two years, the oil market has been in constant surplus stock, with only Saudi Arabia and Russia supporting the price by taking about 2 mbpd from the market, helping US shale companies continue to pump and generate higher revenues. Because the two countries failed to cope, they pulled off this trick at the worst possible time for the US when a coronavirus hit its economy.
It may turn out to be detrimental to everyone, but if the Saudis wait for them, it can certainly put them back into the swing makers’ production like they were in the 1970s. Russian Putin sits back and enjoys the show because it would be very good for him to let the shale crumble – and they can resume production once the oil price stabilizes, since their production price is around $ 15-20 / bbl. Brent, still a lot lower than shale at $ 45 / bbl. WTI. Needless to say, Russia will not consider a reduction unless the US removes any and all of its sanctions. Will Trump really discount all this? Is there anything here to bring to the table?
Initially, Trump saw this price drop as a victory for consumers, taking credit as much as anything that happens in the US, regardless of the real implications. But now, given how many shale companies are suffering and facing potential bankruptcy – like Occidental Petroleum (OXY) Teens and Whiting Petroleum (WLL) He petitioned for Chapter 11 – this question now concerns him because a lot of his donors are from Texas, and slate is an American kid.
Of course, in his usual fake news style, he makes headlines about how he’ll manage to make the deal. It is almost impossible for Trump to mediate any kind of oil deal unless he succeeds in leaving all US shale companies, as well as Saudi Arabia and Russia; an impossible feat.
Even with the selected OPEC members, they could not coordinate the cut. Do we really think that we will manage to manage the global cut on that pure scale and trust Saudi and Russia? I think imagining penguins flying would be more likely.
The goods themselves follow their physical market dynamics quite honestly, and rightly so. Since oil is closed in various regions, their prices are even negative because physical oil has nowhere to go.
On the capital side, the biggest anomaly or trading opportunity seen here is the sale of Europe’s major oil companies like British Petroleum (BP), Royal Dutch Shell (RDS.B), Totalfina (TOT) and Equinor (EQNR). Oil majorettes have been one of the worst intermediaries in oil playing – despite their dividends, they have been on the decline for many years as they simply never manage to capture higher oil prices on the way up, and lose more on the downward path.
Now, with oil prices lower than the average share of $ 50 / bbl. Brent, even buybacks of their stocks and dividends are in jeopardy as we see on dividend exchanges and dividend-paying swaps. In the past two weeks, European oil majorettes have risen 50% as oil is still late at lower prices of $ 27 / bbl. This anomaly is only presented in European names, like all US oil majorettes like Exxon Mobil (XOM) and even larger ones like Diamondback Energy (fang), they decline logically with the price of oil as companies are slowly running out of money. How is that possible? Blame European stock exchanges and regulators.
Exchanges and regulators never seem to learn from past mistakes. They are inclined to follow the same actions as during the past crisis, hoping that it will stabilize the system, but in fact cause even more instability and financial pain to investors, companies and asset managers by doing so.
European stock exchanges, including Italy, Spain and France, have banned short sales of about 90 shares. It was intended to last one day, but is now in effect for the last two weeks to reduce the fall in the index. The list of stocks is almost impossible to find, as their goal was to prevent the sale of banks more, but in fact distorted all the stocks of large European entities. How is it a legal or sustainable strategy? Someone can shut down trading rather than make such harmful rules because they do not help.
The principal is only a company that is valued from its cash flows and dividends. If they go down, so does capital – that’s financial modeling 101. Its top row is driven by real, profitable commodities, in this case Brent oil. When one models the top line and calculates earnings per share, there is no way that, justifiably, can present an earnings upgrade and see stocks up to 50%. European majorettes have fallen 20% to date after the latest brief squeeze, with oil prices down 60%. The prices are fundamentally wrong.
This is classic highway manipulation and looting by European exchanges. For the past few weeks, safeguards have been forced to cover shorts to comply with regulators. Still, these are $ 100 billion multinationals, not some small mid-cap entities that have no free flow.
Every day we see the oil price averaging $ 27 / bbl. Brent, their earnings will continue to decline and cash flow will decline. Stocks can diverge so long before reality sets in, and longer-term owners like retirement funds – who really hold it in their portfolio – will start waiting around in their heads and saying it’s just rude. This may be one of the best-selling opportunities in this market, if you can call early and early enough to borrow, or if exchanges remove the ban now that markets are bigger.
These differences often happen on rare occasions while the market is dysfunctional or we go through an exogenous shock, as we currently go through. But after a period of volatility, logic prevails and the fundamentals converge. After all, it’s arbitrage between stocks and commodities – poorly defined, but one nonetheless. For right or wrong reasons, the price of oil will only stabilize when all supplies are stocked and demand returns slowly, which is not at least several months, since all airlines are established. In order for the supply to be cleaned, we must begin to see well-closed windows.
According to last week’s DOE data on oil reserves, US oil production was still around 13 mbpd. The oil price will have to stay longer until all the weak players have been flushed out and the wells closed. Filing for bankruptcy is not enough as oil can still be produced through a third party. We need to see companies leave, forever. Once you do this, only those with the lowest costs will survive. And once demand returns, maybe Saudi Arabia and Russia can finally come out on top. Nut Trump.
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