Storage Wars

Factory Worker filling bottles with Crude Oil.

Where else can we put it? I shook my head last week when the oil market rallied on the news of a 10mm barrel from OPEC. The Wall Street 'Brains Trust' have never understood the oil market. This cut was never gonna be enough, but oil dutifully rallied. Retail investors, mentally anchored by years of $60 oil, tried to catch the bottom thinking oil was cheap.

Be careful, the bottom you pick may be your own.

Since the days of the first OPEC embargo in 1974, Americans have always been fearful of the power of the oil producers' cartel to "cripple" the economy. This fear has often driven the actions of Washington as well as the financial markets. The swift response to Iraq's invasion of Kuwait in 1990 is but one example of hair-trigger U.S. oil policy. Those days are long gone.

Now, as the shale revolution has made them crude self sufficient, it is America's turn to weaponize oil. They will likely cut supplies at today's meeting of the arcanely named 'Texas Railroad Commission', the body with the power to proration U.S. crude oil supply. I guess we should give them an honorary OPEC membership card.

I have not been a fan of oil equities since the last collapse in 2016. That event, although shocking to many, looked eerily similar the 1986 collapse that I had endured as a buyside oil analyst. It takes years to recover.

Early in the 2016 rout I remember drawing on an oil chart and circling $25 a barrel. That was when the near contract was trading at $65 down from $100. I remember saying at the time "the last barrel prices all the rest". It still does.

The complexities of world oil supply & demand are many. There is no 'one price' for oil. Geographic and physical differences mean prices can vary widely across the spectrum of global oil markets. Check out 'oilprice.com'. It shows more than thirty separate prices ranging from $27 to -$47 per barrel. I think only Starbucks has a more complex menu ... not to mention higher prices.

So what is oil worth? Different things to different people obviously. For the trader who is 'long' contracts for today's settlement, it's a painfully negative number. For Royal Dutch Shell, who recently approved a major $6Bn investment in Australia, the decision is quite different. The long run cost curve for energy is what matters. And for that they use the marginal cost of 'new' barrel. And given the high environmental bar set by most jurisdictions, I can't see that being much lower than $25/ barrel.

The current problem is one of a lack of storage capacity. In normal economic times (and when do they come back?) there is ample floating storage for oil to absorb the short term oversupply. This environment is unprecedented. The collapse of demand is multiples of what a normal slowdown would produce. More supply curtailments will be necessary given the physical reality of full storage.

(For a list of possible storage alternatives, see below).

I believe there is lots of $65 oil but not a lot of $25 oil. Investing in equities that are 'pricing in' sustained low oil prices should be a winning strategy in the long run. Oil stocks have had a muted reaction to the collapse of the May contract as they correctly focus on the 'out' months. Today, with Brent down hard and June contracts for WTI below $20, I expect some limited downside.

But remember to not run out of the store when they put everything on sale - if they do.

Emergency Crude Storage Options

Oktoberfest cancelled soooo... big steins!

737 Max Planes - tight and barrel shaped

Football Stadiums - just like a big oil tank

Walmart Shelves - might leak a bit, but no TP left

Pot Greenhouses - thanks to Bay St. for the funding

This Guy's Head - not currently in use

Risk Model; 1/5 - Risk Off

With the RSI at 54 but fully 10% below a now falling 200d moving average, the XIUs are mixed. Without Shopify the TSX would be much weaker. Same for the tech heavy U.S. market. Take out AMZN, MSFT and NFLX etc. and last week wasn't great.

Last week's numbers from the AAII survey were inconclusive as the 'Neutral" category increased at the expense of both 'Bull' and 'Bear' readings. Still on 'off' position.

The Copper/Gold ratio is still sick. Today's rout in Copper won't help. It is trading well below the marginal cost of replacement and doesn't have the storage issues of oil. Back up the truck if we see sub $2.

This bounce in volatility is signalling the start of a consolidation phase in the recent rally. The chart below shows the trend break to the upside as the complacency rally runs out of steam. The sober second thoughts generated by the oil collapse will soon spread as companies struggle to adapt to the sudden stop economy. Patience, people.

I'm 100% cash in my trading account as I wait for the model to come around. I took my chill pill last week.

I heard Georgia will open first. Maybe I could go to Atlanta to get my hair cut.

Volatility Index