This page has been archived and commenting is disabled.

Keystone Comedy?

Bruce Krasting's picture




 

 

How about the price of crude? It's now down 40% in six months! The oil biz has been knocked on its ass as a result. The oil stocks have been taken behind the shed and beaten with a stick, losses of 20-40% in market cap are common. The fallout (good and bad) from the drop lead in all directions. It might even extend to politics.

The forces that have brought us the big drop have not gone away - the market is looking at an array of factors that could lead to still lower prices. The principal issue is supply - there's too much oil around in the spot market, the future for global supply has been tipped by American/Canadian production. What's next? Assume this scenario plays out:

In January of 2015 the new Congress passes a Keystone Pipeline bill. The law then goes to Obama for his yeah or nea. Obama says he will consider this important matter and will make a decision in a matter of days. There is uncertainty as to the outcome. The operating assumption is that O will go through with his oft made veto threat. 48 hours passes - and then this headline hits the DJ tape:

Obama signs Keystone Bill - Seeks "compromise" on other issues.

 

Okay traders - What's your knee jerk reaction? Do you sell or buy WTI on the news? How about Brent? Hit the bid or take the offer? Better yet, how do you think the Algos will react?

Me? I think the headline is, (short-term), bearish for crude. The quick read on this is, "Jeepers! More supply!"

The Keystone Pipeline will not influence supply and demand for a few years. But after that, there will be more global supply of refined products and direct exports of Canadian crude that has not been 'commingled' with US crude. The knee-jerk market reaction of 'lower on the news' is probably a correct read of the future.

Agree with that? If so, where does that take us? Say the 'Keystone news' results in another 10% leg down in crude. Where does that take us?

The stocks of every company in the oil biz will fall further. The guys who run these companies hate it when their stock goes down. Most of them have incentive stock options that are already going up in smoke. Even worse, when the stock goes down their ability to do M&A deals is impaired. Issuing more stock when the stock is already in the shitter is always a bad plan.

 

I'm thinking this through and laughing my ass off. All of the people who were supporters of Keystone now have a very good reason to put it off. Those in Congress who were the biggest supporters were getting financial support from the oil industry. Those same Congressional supporters are now getting calls from Big Oil:

"We're getting killed already - please, please find a way to put this off for now".

The other side of the aisle, who has always been anti Keystone is hearing:

"Look at what cheap crude has done - the middle class is getting a very big boost - we need them in 2016, so lets do this and take the credit."

The idea that D.C. lobbyist are doing 180's on this is a comedy. There's not a tar sands operator, wildcatter, fracker, equipment company, driller, pipeline operator, train owner in the country that wants to see Keystone happen. Go figure.

 

Note:

I started this with a most unlikely assumption - that Obama would sign a Keystone bill. Based on the past, there is a reasonable expectation that O will veto. But this is the present, and Obama's views on things have changed.

I don't think Obama cares a wit about politics any longer. He's willing to use Executive Action to get his agenda moved. He's no longer making nice with Reid, Pelosi and Schumer. Obama wants to leave his mark on history. What would he get if he signed off on Keystone?

- O wants to crush Putin. Keystone, by itself, doesn't do that - but it might help.

- O wants to raise the gas tax and build bridges. When gas is sub $2 he might get support for that.

- Cheap crude means little or no new fracking. O can toss that out to offset criticism from environmental types who are anti Keystone.

- O's history will be tied to the auto industry he bailed out. Cheap gas is very good for the autos. If gas is $2, auto sales will hit 18+m PA. The demand for auto workers will offset the job losses from those drilling new holes.

- $2/ gallon is a big boost for the middle class. Under Obama the top 10% have done great, the bottom 20% have benefited, but the middle 70% has been shafted. Cheap gas might help them forget they got left out.

- Net-net, lower crude is a positive for consumer's net disposable income. It will be a net plus to GDP. This increases the likelihood that the next recession (it's already overdue) will not happen until post 2016. How much would O like that?

- If GDP does stay positive, the US is on a glide path for a budget deficit of 2.5% of GDP in 2016 (to explode a few years later). O starts with 10% and ends with 1/4 of that - legacy material.

- Oh, did I mention that thing about Putin? That's Job #1.....

 

Bottom line - The cards in this deck are not aligned the way they were a half-year ago. An Obama veto of Keystone is no longer a sure thing. Proving once again that crude prices have strange bedfellows.

 

Screen Shot 2014-12-06 at 12.37.54 PM

 

 

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Sun, 12/07/2014 - 18:01 | 5526573 sunkeye
sunkeye's picture

Appreciate the acumen.  And I'm shocked SHOCKED politicians' stances would change with the shifting (tar) sands (pardon a bad pun try) - their prinicples upon which they stand being so rock solid and all.

#DoucheBagClubAllofThem 

Sun, 12/07/2014 - 18:55 | 5526704 OpenThePodBayDoorHAL
OpenThePodBayDoorHAL's picture

Bruce = acumen. Obomba = befuddlement. We can rely on his court of buffoons to extract defeat from the jaws of victory at each and every turn. These people have no friggin clue what they're doing, from the chicks who smirk and lie from the podium at the State Department to the Wall St. Yes Men he installs. Take a brief tour, from Health Care to Immigration to the Justice Department, I mean could you possibly assemble a more incompetent crew if you tried? I used to think they were triangulating some secret strategy, then I thought they were evil minions, now I just think they are complete rubes and utter morons.

Sun, 12/07/2014 - 17:05 | 5526460 Oil_City_News
Oil_City_News's picture

Endangered Species Support Keystone XL Pipeline

SAND HILLS, NE—Despite emotional protests from environmental groups around the country, the vast majority of residents actually living in the region that could be affected by the Keystone XL pipeline are in favor of building it.

"The technology isn't as iffy as it was twenty, thirty years ago," said a phyllopod shrimp, a long-time denizen of Sand Hills. "I mean, sure, there might be some guys in boots walking around, but it's no skin off my ass if they just watch their step. No need to cancel the whole thing."

"I'm with the shrimp," agreed a blowout penstemon, a tiny regional plant. "And that's coming from someone on the endangered species list. If I don't get run over by a truck, I'll get eaten by grazing cattle. What's the damn difference?"

The Midwest Ledger was lucky enough to happen upon a Western Meadowlark, the Nebraska state bird and a year-round resident of Sand Hills.

"Let me get this straight," the Western Meadowlark said. "You guys have a chance to extend an oil pipeline that will create 20,000 jobs in a moribund economy, generate untold billions of dollars for the country, and lessen America's dependence on foreign oil from hostile nations? Why wasn't this thing done yesterday?"

When told that the pipeline might endanger the region's flora and fauna, the Western Meadowlark burst out laughing.

"Are you kidding me?"

The Meadowlark eventually composed itself, shook its head, then ate the shrimp, defecated on the blowout penstemon, and flew away.

http://midwest-ledger.blogspot.com/2013/01/endangered-species-

Sun, 12/07/2014 - 16:33 | 5526387 BeagleOne
BeagleOne's picture

As much as I disagree with your SS doom scenerio articles, this was a well thought out piece that I agree with 100%.

Sun, 12/07/2014 - 13:08 | 5525934 Yancey Ward
Yancey Ward's picture

Bruce,

As always, I enjoy your commentary, but you are overthinking this.  Obama still cares about the politics.  The environmentalists are among the last of his strong supporters, and they don't care about lower oil prices- they just want the tar sands shut out of the world market.  On the other side of the issue, the supporters of Keystone weren't getting lobbied by the oil majors to support the pipeline unless those majors had major supply in Canada they need to get to market.  Even with oil tanking today, that still hasn't changed.

So, I think the Republicans will likely pass a bill on to Obama in the first part of the year.  As long as one of the chambers is under the veto-override threshold, Obama will veto the bill.  So, tell me- how many votes will the bill have from Democrats?  I don't know- it might get over the veto threshold in the Senate, but I doubt the new House has enough Democrats left that are in danger for voting against it.

Sun, 12/07/2014 - 13:39 | 5526024 Bruce Krasting
Bruce Krasting's picture

I agree that what you describe is a reasonable expectation. I said as much. If, as you suggest, congress passes a veto proof bill, then the headlines change, but the outcome is the same. Obama would love that result. He would get the 'up-sides' without getting his hands dirty.

Sun, 12/07/2014 - 14:23 | 5526124 Yancey Ward
Yancey Ward's picture

I think Obama signs a veto-proof bill.  One thing I have noticed about the man that never changes- he hates losing so much he will switch sides just to make it look like he is on the winning, too.

Sun, 12/07/2014 - 12:38 | 5525867 Baldrick
Baldrick's picture

Keystone does not affect supply, it only affects means of transport of supply. Supply for export specifically. What you are not considering is if the price of oil declines more the tar sands won't be worth it. Pipeline to nowhere?

Sun, 12/07/2014 - 15:04 | 5526241 viator
viator's picture

The Energy East pipe is already in the cards which will carry 1.1 MBD Canadian shale oil eastward to Canadian Atlantic export ports and refineries. One problem with Energy East is it will not even carry the expected increase in Canadian production between now and the time it is completed, much less current production. So Keystone is still needed as world energy appetite will still increase long-term. Lot's of money riding on Keystone as well as jobs. It will get built. Even the unions support it. Who is going to run against it in 2016? Losers.

Sun, 12/07/2014 - 12:58 | 5525907 jonjon831983
jonjon831983's picture

WCS (Western Canadian Select, ie oil sand crude) sells at a discount to WTI because it is somewhat landlocked.  The point of XL is to unlock WCS for Canadian Oil Sand producers and help bring down that differential.

 

If I'm not mistaken, on CME it shows the existing differential, currently for Jan 2015: -$16.30.  (http://www.cmegroup.com/trading/energy/crude-oil/western-canadian-select...)

Last year the differential hit -$40. (http://www.bloomberg.com/news/2013-11-01/western-canada-select-falls-to-...)

 

"This contract will be listed and traded as a differential until expiration at which time it will then settle as an outright price with the WTI calendar month average as the underlying value."

http://www.cmegroup.com/trading/energy/crude-oil/western-canadian-select...

Sun, 12/07/2014 - 13:43 | 5526037 Kayman
Kayman's picture

You can find WCS/WTI/Brent on this site.

 

http://www.psac.ca/firstenergy/

Sun, 12/07/2014 - 12:19 | 5525825 Amish Hacker
Amish Hacker's picture

Don't know about the demand for auto workers offsetting job losses among the drillers. ZH recently reported that 93% of the jobs created since the crash have been energy-related, and that "oil states have added 1.36 million jobs while non-shale states have lost 424,000 jobs."

http://www.zerohedge.com/news/2014-12-06/jobs-shale-debt-and-minsky

It seems like we would have to sell A LOT of cars, in an environment of low wages and high unemployment, to overcome those headwinds.

Sun, 12/07/2014 - 13:55 | 5526063 Bruce Krasting
Bruce Krasting's picture

Numbers I found:

Drilling - 90k

Extraction - 193k

Support - 102k

Total - 300k

 

Total US auto, (manufacturing, distribution, sales) = 3.9m.

Just manufacturing is 900k.

 

Can autos offset drilling? We shall see.

Sun, 12/07/2014 - 15:06 | 5526251 Amish Hacker
Amish Hacker's picture

Thanks for digging up the numbers, Bruce (and BTW, nice to see you posting again.) Personally, I have no access to the raw data, and I'm not trying to sound argumentative, but I was struck by this claim in the ZH article:

The industry supports almost 1.3 million jobs in manufacturing alone and is responsible for almost $1.2 trillion in annual gross domestic product. 

So, yes, I guess we'll see.


Sun, 12/07/2014 - 12:00 | 5525791 MalteseFalcon
MalteseFalcon's picture

Wait.  Lower gasoline prices are good for the vast majority of Americans?  Whoodthunkit.

Sun, 12/07/2014 - 11:57 | 5525782 markar
markar's picture

a 2.5% budget deficit based on phony GDP numbers, assuming it happens, will be a footnote accomplishment on an otherwise failed presidency. And Obama toppling Putin? Surely you jest, Bruce.

Sun, 12/07/2014 - 11:50 | 5525768 max2205
max2205's picture

The true carnage underway has not been reported. 

 

This move in oil is equaled by the 1880 s railway bust.

 

Head for the hills....the Fed is already there

Sun, 12/07/2014 - 12:28 | 5525845 Payne
Payne's picture

No one has mentioned all the Pensions that invested in Oil in the past couple of years.  Do they realize yet that they are in trouble on those assets or are they waiting on the annual review ?

Sun, 12/07/2014 - 14:28 | 5526141 KnuckleDragger-X
KnuckleDragger-X's picture

Don't forget Berkshire Hathaway. The pipeline goes in and the trains stop hauling oil, Obozo's good buddy Warren gets hammered and he might not donate to the new presidential library/outhouse.

Sun, 12/07/2014 - 19:56 | 5526869 old naughty
old naughty's picture

why, you don't think buddy Warren knows (eh, acts) before hand...or have plan post-O?

Sun, 12/07/2014 - 12:25 | 5525837 disabledvet
disabledvet's picture

One look at the history of bubbles in the USA (and how all the profits end up in the media) is pretty straightforward. "Don't just play the bubble but understand where the money ends up in the end." It's not the Bank that's fer sure.

So yes...we have "yet another energy bust." Money not being worth anything in the USA ("not worth a Continental") is nothing new.

The amount of debt created this to around truly is a sight to behold however. Don't go running to Wall Street to expect a recovery. That place is Collapse Incorporated...especially if You the People get stuck with the bill as in fact has happened this go around.

And of course the issue is Black and White.

Repeat after me....BLACK VERSUS WHITE.

Move along...

Sun, 12/07/2014 - 11:17 | 5525703 nmewn
nmewn's picture

"O wants to raise the gas tax and build bridges. When gas is sub $2 he might get support for that."

To hell with that, the price fluctuates up & down, gas taxes never go down. Tell him to go back and confiscate all the billion$ he gave out to Solyndra, Fisker etc. if wants to build his damned bridges.

http://www.gaspricewatch.com/web_gas_taxes.php

Sun, 12/07/2014 - 12:23 | 5525836 shovelhead
shovelhead's picture

Dude, like, that money was an investment in our future n' shit.

'Smatter, you don't want battery rocket ships and solar jumbo jets, or sumthin'?

We could invent, like, wind powered boats...

Sun, 12/07/2014 - 11:27 | 5525718 Thom_333
Thom_333's picture

Hmm...yes. It´s economic  warfare and as in any other war there´s "collateral damage". The odd village being blown to pieces - etc. It does speak volumes about what the real price of oil is. There seems to be something peculiar with the theory of peak oil promoted on so many websites and conferences. Like the theory on global warming. But - watch out if Vlad has to go on an everlasting vacation - then the price will go thru the roof. Easily 160 USD/bbl - if not more. Lots and lots of oligarchs to be created and profits harvested in Russia with a new Yeltsin at the helm.

Do NOT follow this link or you will be banned from the site!