The deal may be all but done but will it solve all the problems for US energy and refiners? Oil prices continue their rally on reports of progress in OPEC production cut talks in Vienna. The latest sign that a deal is in the offing is when the Nigerian delegate Ibrahim Waya, a member of the Nigerian delegation said, “it is likely everybody will be on board by the end of the day.” While the cut will inspire higher prices and market balance soon, it is unclear if it will be enough to save a lot of smaller producers and refiners.
While we have seen US rig counts rise, it is not telling the whole story. Baker Hughes gave the U.S. rig count and it hit 588 as of November 18 after adding 20 rigs, 19 oil and one in gas. Most of those were in the Permian Basin where the shale costs are cheap but how many of those drillers are making money? Not that many if you believe this Reuters report.
They quote, “Influential short-seller Jim Chanos, who runs hedge fund Kynikos Associates, says the North American exploration and production sector has been a “capital sinkhole for investors.” He is particularly concerned with the fracking business. Chaos said that, “What we’ve realized is over the course of oil going from $40 to $100 to $40 and nat-gas going from $4 to $12 to $2 to $6 to $3, the North American E&P space has never made a dime.” That he says should, “terrify every commercial bank that’s lent money to them.” On top of that he said if banks give drillers more money they are going to drill whether it is profitable or not saying that at least right now, it is a terrible business.
Another big Investor is also warning that there is a major threat to the US economy and that is a government mandated “Renewable Fuel Credits’ or “RINS “. In Today’s Wall Street Journal, Carl Icahn warns that small refiners are being squeezed by regulation that, “threatens to destroy America’s oil refineries, send gasoline prices skyward and devastate the U.S. economy.” He warns that the RINS system was meant to encourage bio-fuels but is making big oil refiners have a monopoly. Icahn says, “The RINS program is effectively doing for the big-oil firms what the Federal Trade Commission would never allow them to do for themselves: destroy their competitors in the refining business. If merchant refiners go under, the big-oil oligopolies will be strengthened and gasoline prices will go up, with ripple effects throughout the economy—lower consumer spending, decreased travel, higher shipping costs, increased unemployment, labor market monopolies, decreased consumer confidence, higher food prices, and less public funding for priorities like education. The failure of multiple refineries would absolutely wreck America’s economy.”
Get ready to go over the river and through the woods as the gas price outlook is not too bad. AAA says that 43.5 million Americans are expected to take a road trip this Thanksgiving and drivers will pay the second-cheapest Thanksgiving gas price since 2008, when the national average was $1.85. They say Monday’s national average price of $2.14 per gallon represents a savings of three cents per gallon versus one week ago and nine cents per gallon on the month. AAA said significant yearly savings persist and pump prices are only five cents higher than compared to last year. Retail averages have fallen steadily since November 6 for a total savings of eight cents per gallon, and drivers in 45 states and the District of Columbia are paying less at the pump week-over-week. The national average is expected to near $2.00 a gallon by the end of the year. Yahoo! (NASDAQ:YHOO)
For oil and natural gas we maintain our long-term bullish outlook. Oil will benefit from the expected OPEC deal but also from strong demand. Not only is US product demand at an all-time high for this time of year, we are seeing the impact of stimulus spending in China drive mint commodities. We should also see China pick up fuel purchases ahead of winter.