A couple of things emerging this week.
First, the oil issues are answered... both in short term, resoundingly, and out to some undefined and still not able to be defined mid-term function.
The Saudi's withheld from making pricing announcements until today... and, oddly, a few things have emerged from that event being stretched out to the right from the originally planned Friday announcement. Consider that event, in itself, as a proxy for the emerging market reality in everything right now: delays in execution are seen paired with a lowering in expectations, and a reduced potential for meaningful multi-lateral coordination or cooperation... but all still occurring "for now" within a framework of increasingly suppressed price volatility. Seeing the relaxation of the hard $2 price floor imposed in trading in UCO as a proxy... should tell you how to play it now... with SCO making a lot more sense... even if there is still no reason to expect any rapid moves... as the market gears are now lubricated with heavy crude instead of machine oil.
Today, the Saudi's quietly mumbled out price announcements... shy of the Russian's hoped for $42/bbl coordinated price... with "hefty discounts for all our good friends". Unexpectedly, it was the Mexicans and AMLO who played a lead role in answering the call to reduce production by responding to the call for cooperation with a resounding "Meh."
The biggest "aha" to emerge from the oil trade... was the exposure of the Mexican state secret... that the re-invigoration of Mexico's economic oil-based engine PEMEX is being executed fully under the umbrella of the financial protections that also sustain the U.S. shale producers potential, in spite of prices apparently working against them. Having access to greater than market price stability enabled through financial engineering, allows price risks to be spread over time. That doesn't fully insulate producers from the effects of longer term shifts in the markets... but it does insulate them from those risks relative to those without that protection... and it buys them a lot of time in which to make adjustments in plans that others will be compelled to make in a lot less time. Who cuts first and most gets answered that way... right up to the limit of tanks all full. Those left as the most time dependent will cut first and most... not later than tanks all full... with market share shifting to those with the greatest financial acumen. (Long live the free market.)
One consequence is that the admittedly large impacts of the financial risks are limited to the impacts imposed on the financial shells that hold oil assets at a given time... but that risk is largely obviated from having meaningful impacts on the assets themselves. Companies might go broke... but the resulting change in ownership ameliorates the new owners risk in cost basis, and otherwise doesn't do much to alter incentives in sustaining asset function. Banks owning oil wells others took risks to create... if the risks are realized in excess... only lowers the real cost of ownership for new owners ? Again, that extends the time function of the market to the time and $ limits of the financial umbrellas protecting those under them.
Also exposed, again, is that ownership and control of access to the flow... now matters as much or more than ownership and control of the potential at the origin. That also, of course, is the core element in design of Russian state oil policy... as they seek to foster European dependence on flows they control, and as minor wars are now fought over control of market access... focused on the routes of pipelines, or control of shipping routes, not only control of the oil fields. The cold war era risks of wars fought to control oil fields... is now reduced to wars fought to control, to enable or disallow, flows...in the routes of future pipelines. As the heart keeps pumping, the risks are shifting to more peripheral weaknesses in the rest of the circulatory system.
And in the market, too... some of the best performances thus far have been seen in the circulatory system, with the biggest opportunities in price/value disconnects correcting most rapidly, some of those still now, while others are still trending more slowly. In the short term, the role of the tankers has been discussed well enough here... they moved first, as it became clear their dual roles in storage and transport ensured rates staying high "for the duration". But, now as the perception of the duration shifts ? The longer the market imbalances last... the slower the recovery emerges, the better for the tankers... so uniquely in this market, things are still looking up even more for them now as expectations of a V shaped recovery fade. DHT off the highs... is more likely to make new highs as this persists. A list of others easy to find. I note some are now releasing news with each transaction in which an asset is repurposed on a new contract. Others less vocal more likely to see movement only when earnings report. A lot of the market still asleep on this story, more as stocks trade higher generally, but the numbers will out in time. Few have improved prospects that way.
So, too, in the land-based segment. ENBL my primary land-based pick as most undervalued has been fun... but ENLC, SMLP, a host of other "lesser" valued issues have been or charts show are close to rebounding. As always, the best performers at first are those who were least loved lately... not those still being loved the most ? Dramatic time lags exist here too in some of the lesser loved players.... but the charts work. Still worth the effort in screening for them... and noting carefully in seeing how they fare when markets turn lower again.
The charts I see on them correctly reflect the market issues. The left side of the charts form a U, the right sides of the charts mostly form a curve-flattened V... a simple gentle slope up to the right. The best are more U like... the lesser issues diverge more closely to an L... some few still trending lower.
The perception of virus risks are changing, again...
To what effect, now ?
First, there is no trade to make based on a hoped for "coordinated policy bounce" in oil prices now. The potential that existed was obliterated by the market tango (or contango) as danced by the producer nations in a stunning failure to cooperate in coordinating decisions to re-balance supply with the altered reality in demand in a deliberately coordinated action... when doing so was critical to the mission. OPEC just died. The higher cost producer members will now bear the fully unhedged brunt of the impact of owning the entire market risk pool.
Second, in oil, it is very clear that there is still a "hoped for" rebound in demand, with expectations based on hope the virus risks pass by quickly and things get back to normal quickly. This week, that hope appears increasingly unlikely to be realized... both because the virus risks are now emerging as considerably more complex, and significantly more dangerous, than has been publicly addressed before now... and as the momentum and inertia in the markets (not the stock market, but the real world markets in trade of goods and services) begins to add more entropy with time.
Third... with that point on entropy, we're no longer talking only about oil. But, still useful to consider oil market impacts on other markets as the realities in supply and demand are sustained "to the right" in a changed environment.
That's most obviously true, in context of our conversation, in the sustained divergence seen developing in the usually closely related trades in oil and gold. As demand for gold and silver increases... with supply chains increasingly disrupted... the cost of producing gold is in decline with oil... but the ability to exploit the lower costs and higher prices in the market isn't uniform.
If you own a business, waiting for government to sort this out is a recipe for failure.
The chart you posted shows differences in how different mining companies are approaching the new reality.
Expect that focus to grow and become vastly more important...
What it shows me... is that I need to be selective in picking shares... to find those few who are managed by people who "get it"... and are aggressive in properly protecting their people, while not sitting around waiting to be told what to do. Producers who succeed in protecting their employees... will keep their businesses going... and make more money than ever... as those others who cannot accomplish that are going to be shut out of the market entirely.
Yes, Amazon is the future again now... but that's a bit short sighted, to consider it as either "for now"... or as only limited to Amazon, with the virus risk seen as a temporary wobble. The fight in oil is really about market share, not price ? But that's even more obviously true about EVERYTHING right now ? Companies that solve their own problems... will survive and thrive. Those that wait for others to solve their employee protection and market access problems for them... are going to be road kill.
The initial shock is over. Governments have mucked things up just as, if you are properly cynical about centralized control schemes, you might and should have expected they would. The brittleness that is imposed on markets by those control schemes... is now imposing a new sorting. And now we're going to see a shift beginning to occur... in which innovation wrests control of the future away from those who were too dependent, and too stupid to prevent this happening... or were deliberate in the enabling... either way.
Those saying "this changes everything" are looking more right. They may be MORE right that "we're never going back to the way things were"... even if they're probably not right at all in their specific expectations about HOW this changes everything... if they're assuming the failure fostered will result in MORE, not less, centralized control.
Which gold producers, on that list you posted, are going to continue enabling a supply of refined metal to emit from their productive plant... and be able to sustain a connection to the market... while ameliorating the risks to themselves and their customers as they do ?
In the race against the virus... the winners in commerce are going to be the ones who can avoid the impact by minimizing the risks to their people... while sustaining productive potentials that others are idling.
As is true in oil... the ability to sustain production is important... but the ability to sustain distribution others cannot is even more important as entropy grows... The flow matters. So, the trade war is far from being ended by this event. As long as the virus risks last... the least tortuous linkages to the market with the greatest end to end supply chain security are the most sustainable...
The "hard bargains" being made in the short term... if necessary to tolerate in facilitating trade in critical things essential at the state level... will soon be placing a cutting edge against those who are engaged in that trade, as they make themselves much less desirable providers in meeting customers future needs.
A new <industrial hygiene> industry seems it is about to be born... where "experts" efforts are refocused away from directing top down government run programs that don't and can't work... to enable more proactive market participants in designing efforts that work, as is required of them now in saving themselves...
We don't need heroics designed to save the world from the top down. We need to save what we've built for the future, by making the world safe for workers to work... one job at a time, and one company at a time... each doing what's required of them in enabling it... while still doing the jobs that need to be done to keep the economy working.
Those still hoping for a V shaped recovery "soon" are now being proven wrong. There may be a silver bullet that is discovered... but the problem we can see now requires several silver bullets, each hitting different targets with precision...
Those producers expecting a U shaped or V shaped recovery... are going to see the right side of the V or U being stretched to the right and pulled lower, likely with the upward pointing limb on the right side of the V or U diverging quite significantly from the vertical...
The exceptions are those who best solve the distribution problems... while lowering risks as they do.
Tankers and pipelines in energy...
Amazon, other e-commerce, also still depending on UPS, Fed Ex, and the USPS more than ever... or have to succeed in developing their own alternative direct to consumer transportation solutions.
The other "normal" transportation providers... will struggle commensurate with the economic impacts ongoing. When even going to the grocery store is a risk best avoided... home delivery is a far more manageable concept for everyone... and it minimizes risks far more than other choices ?
Those companies who find a way to keep people working... AND keep them safe because the company while sustaining connections from producers to consumers, even now... will thrive.
As a consumer... I want to know the things I bought being dropped on my doorstep... were made and delivered by companies that are assuming responsibility for minimizing the risks to their employees... the more as my own safety depends on theirs, too ? |
