Fill 'Er Up (At Less Than 2 Bucks A Gallon)

Includes: AAPL, CLR, IAI, PAA, TNA
by: Mercenary Trader


According to GasBuddy, which tracks the numbers, the US national average for a gallon of gasoline is now $2.74. Meanwhile at a gas station in Oklahoma City it hit $1.99.

Brent crude — the global benchmark for oil prices — is currently just below $70. The unofficial Saudi target — is roughly fourteen percent lower.

Junk-rated energy producers have issued $90 billion worth of debt in the past three years.

At a gas station in Oklahoma City, you can now buy gas for $1.99 a gallon.

According to GasBuddy, which tracks the numbers, the US national average for a gallon of gasoline is now $2.74.

That is 51 cents per gallon lower than a year ago.

Meanwhile, at an Oncue Express gas station in Oklahoma City, Oklahoma, the price dropped to $1.99 - first in the nation to crack the two dollar level.

We remember the cheapest gasoline we ever bought. It was a filling station in north Georgia in the mid-90s.

The cost then was 83 cents per gallon. Could we be headed back that way?

The joke below shows what we've gotten used to. Regarding prices at the pump, most folks probably thought $1.99 would never be repeated in their lifetimes.

The world has changed in surprising ways…

At places in the Bakken, crude oil is already sub-$50.

Via Bloomberg:

Oil market analysts are debating if oil will fall to $50. In North Dakota, prices are already there.

Crude sold at the wellhead in the Bakken shale region in North Dakota fell to $49.69 a barrel on Nov. 28, according to the marketing arm of Plains All American (NYSE:PAA) Pipeline LP. That's down 47 percent from this year's peak in June, and 29 percent less than the $70.15 paid for Brent, the global benchmark.

An interesting coincidence. Harold Hamm's oil fortune is also down roughly 50 percent from its peak.

Hamm is America's richest oil man, via drilling in the Bakken shale. His company, Continental Resources (NYSE:CLR), has seen its share price cut in half on a foolish lifting of oil hedges.

The price fall has lightened Hamm's wallet to the tune of $10 billion.

Harold Hamm - no longer smiling

The Saudis, meanwhile, are reportedly cool with sixty bucks a barrel.

The day after Thanksgiving, we pondered aloud whether the Saudis could be targeting sixty dollars a barrel in their effort to kill US shale producers.

Lo and behold, via CNBC / Dow Jones:

Saudi Arabia expects oil prices to stabilize around $60 a barrel, Dow Jones reported Wednesday, citing sources familiar with the situation.

The report quoted an unnamed Gulf oil official as saying that if prices did fall below $60 "it won't be for a long time."

Brent crude - the global benchmark for oil prices - is currently just below $70.

The unofficial Saudi target - if the Dow Jones source is accurate - is roughly fourteen percent lower.

This means prices yet lower still for West Texas Intermediate crude (the North American benchmark).

Junk-rated energy producers have issued $90 billion worth of debt in the past three years.

These are the guys the Saudis want to kill. Via Bloomberg:

Bond investors who helped finance America's shale boom are facing potential losses of $11.6 billion as oil prices plummet by the most since the credit crisis.

The $90 billion of debt issued by junk-rated energy producers in the past three years has fallen almost 13 percent since crude oil peaked in June…

A thirteen percent fall is just the start. The Saudis are not messing around, they are going to the mattresses.

That's why bottom-picking in the oil patch is a little too clever for our taste.

As Jeremy Grantham has joked, lazy value investors often do better than diligent value investors in a crisis.

That is because diligent value investors get excited when they see incredibly cheap values… and buy too early…

Whereas lazy value investors aren't roused to act until "incredibly cheap" becomes "insanely cheap"… or even "catastrophically cheap."

This could yet happen to energy stocks.

Russia (and Venezuela) could be pushed over the brink…

A morbid joke in Russia now centers around the number "63." Via Bloomberg:

Heard the one about Vladimir Putin, the oil price and the ruble's value against the dollar? They will all hit 63 next year.

That's the joke doing the rounds of the Kremlin as the Russian government digs in to weather international sanctions over the conflict in Ukraine…

Putin celebrates his 63rd birthday on Oct. 7. The price of Brent crude sank to a five-year low of $67.53 a barrel this week. The ruble has dropped to near 55 to the dollar from as strong as 34 less than six months ago, meaning it needs to lose another 13 percent to complete the joke…

We talked about this in "The Dogs of War," the Strategic Intelligence Report for August 9th, 2014.

Vladimir Putin still rules in Moscow, thanks to a strong popularity base with the Russian rank file.

This popularity is maintained, in part, by state media control and nationalist propaganda (blaming the West for all Russia's ills).

But as the Russian populace is pressed to the wall by economic hardship, that popularity could crumble.

This in turn could lead Putin to "do something" quite nasty on the geopolitical pot-stirring front.

Venezuela, too, is facing the same calculus… and possible forced sales of ample gold reserves.

…and even China is destabilized by rock-bottom energy prices.

You would think China, at least, is on the winner's side of the ledger from rock-bottom energy prices.

Not necessarily though. Consider:

  • China is the world's fourth-largest oil producer
  • China is the world's largest coal producer
  • Multi-year oil and coal lows are disaster for producer regions
  • Insolvent regional governments destabilize the credit system.

Via the Financial Times:

China last year produced 4.45m barrels a day of crude, behind only Saudi Arabia, Russia and the US. It has also been pumping more than all the members of Opec barring Saudi Arabia… the fall in crude prices has added to concerns over the prospect of regional deflation in the country's resources-dependent hinterland…

Falling [energy] prices can make it difficult for some of China's regional governments to meet local budget obligations. More worryingly, they also create vulnerable links in the chain of lending rings that can often prop up local economies.

…China is [also] by far the world's largest producer and consumer of coal… international coal prices hit a five-year low last month, ravaging the hinterland that supplies China's coastal manufacturing base. In Shanxi province, which produces a quarter of China's coal, debt-laden private mining groups and steel mills have collapsed…

The United States, meanwhile, keeps rolling along… as the Fed Beige Book and ISM numbers show…

Against this backdrop of pain, the United States again comes out on top.

The Saudi-led oil wars are putting the hurt on everyone, including US shale producers. This oil war threatens to blow up high-yield credit markets as junk debts go bad.

But the United States has a massively large and diverse economy. Far more so than elsewhere, the low price of oil helps as much as hurts.

And thus the latest reading of the Fed's "Beige Book," a broad measure of economic activity, was optimistic and upbeat. Via the WSJ:

The Fed's latest "beige book" for the period through Nov. 24 was broadly upbeat, marked by expanding economic activity across most of the country and optimism about growth prospects.

"The tone of the Beige Book report was cautiously optimistic, suggesting that the Fed continues to see expansion continuing across much of the U.S.," said Gennadiy Goldberg, U.S. strategist at TD Securities.

The latest read of the ISM manufacturing index - a measure of economic activity - was also above expectations.

As we have said repeatedly, it's little wonder the US is strong… or that the US dollar trend is the biggest trend in the world.

Our long IAI position took off running - and provides a portfolio offset to the small caps short position.

As shared in the December 3rd trading setups, we bought the breakout in IAI, the iShares Broker Dealers ETF (NYSEARCA:IAI).

IAI is now ripping and running (as the chart below shows).

We maintain our short Russell 2000 Small Caps (NYSEARCA:TNA) position and still like the trade.

This market is very precarious. Small caps have been weak and straddling the red line (or plunging below it) this entire year… and things could yet take a hard turn south.

With that said, though, our IAI position is twice the size of our TNA short (16.0 vs. 8.0).

This was deliberate, as we still have ample short exposure across the energy stock space. If the market continues to run, IAI should outpace small caps to the upside, providing balance to the portfolio.

We often consider total portfolio composition when sizing our trades.

Our initial long position in Apple Inc. (NASDAQ:AAPL) was gigantic at the time for example (24.0) because it served an additional purpose: Offsetting heavy short exposure in the major indices (now since lifted).

The above is excerpted from our December 4th Live Feed commentary.

Disclosure: The author is long AAPL, IAI. Short TNA.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

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