When
OPEC announced on Thanksgiving Day that it would maintain oil production at
30 million barrels per day, chaos broke out in the oil market, and the price
of oil around the globe spiraled into a terrific plunge. The unity of OPEC,
if there ever was such a thing, was in tatters with Saudi oil minister
smiling victoriously, and with a steaming Venezuelan oil minister thinking of
the turmoil his country is facing [OPEC
Refuses to Cut Production, Oil Plunges off the Chart].
The
bloodletting in the oil markets on Thursday led to some wobbly stability on
Friday, and for a while it seemed oil had found a bottom, but then the
US stock market closed early while crude continued trading, and suddenly all heck re-broke loose, and
the US benchmark WTI plunged again and broke the $66-a-barrel mark before
coming to a rest at $66.06. After a near 10% dive in two days, WTI is now
down 37% since June!
This
chart shows the Thanksgiving plunge following OPEC’s decision, the deceptive
stability Friday, and the afterhours plunge:
Now
more information has emerged, confirming prior “rumors” and “conspiracy
theories.”
During
the closed-door meetings in Vienna, Saudi oil minister Ali al-Naimi told OPEC
members that OPEC had to combat the US fracking boom. If OPEC cut output to
raise the price of oil, it would lose market share, he argued. The way to win
would be to allow overproduction to depress prices to the point where they
would destroy the profitability of North American producers. And they’d have to cut production, rather
than OPEC.
With
Saudi Arabia’s overwhelming power within OPEC, his argument won against
objections from desperate members, such as Venezuela, Iran, and Algeria,
which wanted a production cut to push prices back up.
“Naimi
spoke about market share rivalry with the United States, and those who wanted
a cut understood that there was no option to achieve it because the Saudis
want a market share battle,” a source told Reuters
to make sure the message got out.
Asked
if this was a response to rising US production, OPEC Secretary General
Abdullah al-Badri essentially confirmed OPEC had entered the oil war against
the American shale revolution: “We answered,” he said. “We keep the same
production. There is an answer here.”
The bloodletting is spreading.
While
the US fracking boom is the official target, Canada’s tar-sands producers are
getting hit the hardest. The process is expensive. Their production is
largely land-locked and often has to be transported to distant refiners in
Canada and the US by costly oil trains. Yet these high-cost producers are
getting the least for their oil: The heavy-oil benchmark Western Canada
Select (WCS) traded for $48.40 per barrel on Friday, down over 40% from June,
the cheapest oil in the world.
Their
shares got knocked down in sync: For example, Suncor Energy dropped 9% on
Friday, down 27% since June; and Canadian Natural Resources dropped nearly
10% for the day, down 28% since June.
The US
shale oil revolution is bleeding as well. Shares across the board are getting
hit, many of them outright eviscerated. If the word “plunge” occurs a lot,
it’s because that’s what these stocks did on Friday.
- Goodrich Petroleum plunged 34% on Friday; down
80% from June.
- Sanchez Energy plunged 29.5% on Friday, down
71% from June.
- Clayton Williams Energy plunged 25.6% on
Friday, down 61% from May.
- Callon Petroleum plunged 18.6% on Friday, down
60% from June.
- Laredo Petroleum plunged 33.5% on Friday, down
66.5% from June.
- Oasis Petroleum plunged 27.2% on Friday, down
68% from July.
- Stone Energy plunged 24.1% on Friday, down 68%
from April.
- Triangle Petroleum plunged 25.6% on Friday,
down 62% from June.
- EP Energy plunged 25.3% on Friday, down 54%
from June.
The
list goes on. Even large oil companies got clobbered:
- Exxon Mobil down 4.2% for the day and 13% from
July.
- ConocoPhillips down 6.7% for the day and 24%
from July.
- Marathon Oil down 11% for the day and 31% from
early September.
- Occidental Petroleum down 7.4% for the day and
24% from June.
- Anadarko Petroleum down 10.5% for the day and
30% since late August.
Then there is the Oil Service sector.
The
Market Vectors Oil Services ETF dropped 8.9% for the day and has plummeted
34% from June. The current standout is its 10th-most heavily weighted
component, Norway-based SeaDrill which had announced that it would cut its
dividend to zero to deal with its mountain of debt, given the current
environment. Its shares swooned on Thursday and Friday a total of 28% and are
now down 70% from a year ago. The whole sector followed. This is what debt
can do when the going gets tough.
Those
are among the official targets of OPEC’s scorched-earth oil war. They’ve been
hit, and they’re taking on water.
There is collateral damage.
With
increasing amounts of oil being carried by oil trains, the railroads, which
had been trading near their exuberant 52-week highs in large part due to the
lucrative oil-train business, suddenly took a dive on Friday:
- Union Pacific -4.9%
- CSX -3.8%
- Canadian Pacific -8.0%
- Norfolk Southern -4.7%
- Kansas City Southern -5.1%
- Canadian National Railway -4.6%
- Burlington Northern Santa Fe, which is owned by
Warren Buffett’s Berkshire Hathaway, isn’t publicly traded. But if the
oil-train business gets hit, so will Buffett’s “steal.”
But
this pales compared to the carnage in tank-car builders. On Friday, they
plunged:
- Greenbrier -15% for the day, -28% from its
September high.
- American Railcar Industries -12.9% for the day,
-28.3% since August.
- FreightCar America -7.5% for the day, -21%
since September.
- Trinity Industries -11.3% for the day, -36%
since September.
The oil
price move is already cascading through American industry. Bondholders are
next. The US fracking boom was built with debt, much of it junk rated. And this
pile of debt is now at the confluence of the collapsing price of oil, high
costs of production, and sharp decline rates of fracked wells that force
drillers to continue drilling just to maintain their revenues. It’s a toxic
mix.
And there are victims of friendly fire, so to speak.
Particularly
OPEC member Venezuela, dogged by the world’s highest inflation and worst
budget deficit, is running out of options. On November 18, President Nicolas
Maduro ordered $4 billion in loan proceeds from China to be transferred from
an off-budget fund to one counted in the international reserves. The sudden
appearance of $4 billion in international reserves pumped up bondholder
confidence: the next day in intraday trading, Venezuelan bonds jumped the
most in six years.
But it
didn’t last long. Within a week, its international reserves dropped by $1.3
billion to $22.2 billion, Bloomberg
reported. Venezuela had burned through one
third of the Chinese money in one week. Venezuela must have much higher oil prices.
Unless a miracles happens, or unless China bails it out altogether – at a
steep price – the country is headed for default.
Russia,
third-largest oil producer in the world, after Saudi Arabia and the US, also
got hit, as did Norway, and their currencies have been brutalized [Ruble
Freefall: And the Ugliest Currencies Are?]
But this time it’s different.
This
time, OPEC is trying to depress oil
prices. In prior years, OPEC tried to push prices as high as possible, but
without killing the global economy and demand for oil. The balancing act led
to high oil prices that consumers struggled to pay but that allowed the
US shale revolution to bloom. If oil had remained at $40 or $50 a barrel,
fracking wouldn’t have taken off. OPEC was, ironically, one of the
enablers of fracking (yield-desperate investors, driven to near insanity by
the Fed’s zero-interest-rate policy, were the other one). And now fracking is
threatening to make OPEC irrelevant.
Saudi
Arabia, formerly the dominant oil producer in the world, the country whose
mere words could shake up markets and manipulate US policies in the Middle
East, and the master of an all-powerful OPEC, is reduced to struggling for
simple market share, the hard way.
A lot
of people believe that the plunge in the price of oil will be brief, and that
it has gone pretty much as far as it can go, given production costs in the US
and Canada. But the bloodletting in the US fracking revolution will go on
until the money finally dries up. Read… How
Low Can the Price of Oil Plunge?
