Did Hell Just Freeze Over?
Oil soars on OPEC news... Did hell just freeze over?... Why we're still skeptical... U.S. oil production could soar again... A special invitation from Steve Sjuggerud... The best holiday gift you'll give (or receive) this year... P.J. O'Rourke: Can the U.S. government be run like a business?...
Yesterday, OPEC announced a groundbreaking deal to cut its daily oil production...
The Saudi Arabia-led cartel said it had finally reached agreement to cut production by 1.2 million barrels per day, or about 1% of the world's total daily production. It also said non-OPEC producers, including Russia, had agreed to cut their production by another 600,000 barrels per day.
Perhaps most surprising, Iran agreed to participate in the deal as well. As the Wall Street Journal reported...
Saudi Arabia and Iran, whose differences blocked a deal that aimed to freeze production earlier this year, made the deal possible by coming to a tortured compromise on production figures. Iran was allowed to increase its production by 90,000 barrels a day, a significant victory for the Islamic Republic as it tries to rebuild its economy after the end of Western sanctions.
But the deal allows both Iran and Saudi Arabia to claim a win, by pointing to different sets of numbers. Iran, using production figures generated by OPEC, can say it is raising output, while Saudi Arabia can point to the Islamic Republic's output figures and say that Iran is agreeing to a cut.
Crude oil soared on the news...
West Texas Intermediate ("WTI") crude – the U.S. benchmark for prices – rallied more than 9% to near $50 per barrel. Oil stocks did even better... Shares of more than 50 different U.S. oil exploration and production companies rallied 10% or more on the news, according to the Journal.
Today, the rally continued... WTI was up more than 3% to nearly $52 per barrel as of midday trading.
The Journal reports OPEC is targeting prices of $55 to $60 per barrel... a "sweet spot" that would provide some relief for the struggling, oil-dependent economies of many of its members, but is still low enough to support economic growth.
But we don't expect the euphoria – or higher prices – to last...
As regular Digest readers know, we've long been skeptical a deal would be reached... or more important, actually adhered to if it ever was. That has not changed...
Despite this week's historic announcement, it's still too early to tell if these countries will actually follow through on their promises. History shows they often haven't... And OPEC has no authority to make its members comply.
OPEC has a terrible track record of following its own production quotas. According to Morgan Stanley commodities analyst Adam Longson, the cartel exceeded its quota by an average of 883,000 barrels per day from 2000-2008.
Recent history hasn't been much better... Despite ongoing talks to freeze or cut production throughout this year, OPEC actually increased its production by more than 1 million barrels per day since this spring. In other words, even if all members keep their promises, the deal will only bring OPEC's production back to around where it was earlier this year.
In short, the odds already appear to be stacked against the success of OPEC's new plan.
Our colleague and resource expert Matt Badiali has also been a longtime skeptic of any OPEC deal...
Matt shared his thoughts on the news in a private note this morning...
After three tries over the past year, it looks like OPEC could reduce its oil production from the flood that is currently on the market. It wasn't easy...
Iran was always the major sticking point for an agreement. The country is just emerging from years under Western economic sanctions. Its oil industry was just re-emerging, when Saudi Arabia floated plans for its first production cut. Iran was so angry, it didn't send a representative to attend that meeting.
Almost a year later, with Iran setting the terms, there is almost a production cut in place. In total, the proposal requires OPEC nations to cut production by 1.2 million barrels per day. Saudi Arabia agreed to cut production by 486,000 barrels per day, roughly 5% of its current production. The bulk of the other 680,000 barrels per day of cuts will come from Iraq, the UAE, and Kuwait.
But the deal still hinges on 600,000 barrels per day of cuts from "outside OPEC" (read: Russia). If they don't agree, the deal could die again. Once again, the deal was announced before it was finalized. This story usually ends with egg on OPEC's face and oil prices in freefall.
Matt tells us he remains skeptical about this deal… just like he was for the last few. But even if it is successful, he's says he's not betting on oil prices to rise above $60 per barrel anytime soon. More from his note...
Oil prices may see a modest rise over the next few months, but I don't expect this to be the end of the volatility.
For one, OPEC countries cheat like hell. They all need money. The only thing that they have to sell is oil. Therefore, they cheat. Oil demand growth is slowing. According to the International Energy Agency, oil demand could fall by 1.2 million barrels per day in 2017… which would offset the OPEC cut.
Plus, we still have a lot of oil. U.S. oil production peaked at around 9.6 million barrels per day. By September, we were down to 8.6 million barrels per day. A small move higher in price could push U.S. oil production higher again.
U.S. oil production could soon soar again...
Of course, Stansberry's Investment Advisory subscribers know Matt isn't alone in believing U.S oil production could soon ramp up. As Porter and his team wrote in the November issue...
Even assuming that [a deal] does happen and both OPEC (including Iran) and Russia agree to significantly cut production, we don't expect prices to move much higher or to stay there for long. Why not? Because the global "swing" producer, the oil producer with the most excess capacity, is no longer Saudi Arabia. It's the United States.
At prices of more than $50 a barrel, America's shale fields can produce a lot more oil... well over 10 million barrels per day. Thus, if Russia and Saudi Arabia actually cut production, the U.S. will begin to take market share away from these producers around the world. And when that happens, OPEC will fall apart...
As you probably know, we were among the first writers anywhere to report on the discovery of the huge Eagle Ford shale, which in 2010 we predicted would become the largest oilfield in U.S. history. We were forecasting record volumes of oil production years ago, when most pundits were still worried about "Peak Oil" – the idea that oil production was in permanent decline. And even seven years later, it still seems most people simply don't understand the tremendous impact America's shale fields are having on the oil market.
Stansberry's Investment Advisory analyst David Xia says there are several big advantages for U.S. producers today. From David...
Over the past five years, U.S. oil producers have made significant improvements in cost reduction of at least 30%.
Another important metric is the production per drilling rig, which has increased due to more efficient operational and technological advances.
These improvements have allowed companies to survive lower oil prices while maintaining or increasing oil production.
Meanwhile, David notes U.S. producers continue to find new oilfields in low-cost areas. For example, Apache Corporation (APA) recently discovered 75 trillion cubic feet of gas and 3 billion barrels of oil in West Texas, one of the lowest-cost areas in North America.
He also notes the huge backlog of oil that can be produced on short notice...
There are more than 5,100 drilled and uncompleted wells ("DUCs"), and the trend is increasing. DUCs are backlogged wells that can easily be turned on with slightly better oil prices.
In short, the Stansberry's Investment Advisory team believes U.S. producers can easily step in to make up for any real cuts from OPEC. This should keep a lid on prices, meaning the big rally in oil stocks is likely overdone... and the pain for the most troubled energy firms isn't over yet. As they noted in the November issue...
We want to bet against producers with the lousiest assets – formations where it's expensive to extract dirty, heavy oil.
We want companies that have increased their borrowing to unsustainable levels. Ideally, they have a wall of debt coming due. And their declining earnings will struggle to service their heavy debt load.
If they operate without hedging future production (meaning they're exposed to lower oil prices)... even better.
Finally, we're turning the Digest over to our friend and colleague Steve Sjuggerud...
Sean Poynter grew up in a house 100 yards away from me (Steve). He was a world-class surfer from the start...
I remember when he was about 11 years old, seeing him out surfing during a hurricane. He was tiny at the time, even for his age – just a little freckle-faced kid. I thought, "Am I going to have to save this kid?" Then I saw him catch a wave... and he surfed it like a man. He surfed it better than I did! This kid was going to be just fine in the ocean.
A couple years later, at age 14, he was invited by his sponsor Volcom to spend the winter on the North Shore of Oahu at the infamous "Volcom House." Situated right at Pipeline, it was the most testosterone-filled surfing lineup in the world... the ultimate proving ground in surfing.
When the Great Recession hit, Sean lost his sponsorship. He came home to Florida in his late teens, trying to figure out what was next.
During that time, I introduced him to standup paddle surfing... I put him on the board for the first time and showed him the ropes. He was instantly better than everyone else, just like in surfing when he was 11 years old.
I started Standup Journal magazine with two friends because of my love for the sport. When the biggest advertiser in the magazine called looking for the names of future stars, I said, "Well, there are a couple kids in Hawaii, and there's a kid in Australia... but a kid in my hometown could turn out to be as good as anyone." The company (Starboard) sponsored him, and his new career in standup paddling started.
At the time, he was a maverick, riding a tiny six-and-a-half-foot paddleboard in competition, when the standard size was closer to nine feet. He was surfing it like a short board. He was ahead of his time. Competitors had to come around to his way of surfing.
In 2013 and 2015, he earned the title of world champion, winning the International Surfing Association World Championships. He has won events all over the world, from life-threatening waves in Tahiti, to stormy big surf in France. He even won a big-wave challenge – not bad for a Floridian.
Today, Sean lives in California and loves to share the stoke of surfing and paddling with people of all levels.
My relationship with Sean has been a ton of fun... We've taken a few trips together for the magazine, including going to Fiji, which was a big highlight. We paddled a "tag team" 32-mile race across the "Channel of Bones" – the open ocean between Molokai and Oahu. Sean has included me in "team" events – effectively ruining his chance to win. And we did a father/son trip together – with his dad and my son. It's all been in the name of having fun together and sharing life experiences.
And now, we'd like to bring a small group of readers in on the fun...
I asked Sean Poynter to host a group of Stansberry Research readers in Mexico from February 15-19.
It's a rare treat to get private coaching from a surfer of Sean's status. And he's bringing a friend with him – the legendary Ian Cairns (one of the first Australian surfers to break into the fiercely local Hawaiian big-wave scene).
I'll be there with Porter and Sean Goldsmith. We'll be hosting an investment seminar for attendees. We've already had a lot of interest, but we have a few more open spots.
If you're no good at surfing, don't worry. There will be plenty to keep you entertained. And you'll still have a great few days with Porter and me in the sun.
I hope to see you down there. If you're interested in joining us in Mexico, you can learn more about the program right here.
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In today's mailbag, praise for Porter's recent educational series. Send your thoughts – good and bad – to feedback@stansberryresearch.com. And be sure to read on for the latest installment from contributing editor P.J. O'Rourke.
"Hi, I have been away on vacation for the last couple of weeks so have only just had time to sit down and read your pre-'Big Trade' Digest series... absolutely superb! Thank you so much for spending the time to put this series together, it is literally packed full of useful information and I would have happily paid for this series on its own!" – Paid-up subscriber Julia
Regards,
Justin Brill
Cambridge, Ohio
December 1, 2016
Can the Government Be Run Like a Business?
For years, libertarians and conservatives (myself included) have griped that "government should be run like a business."
But would it work? Presumably, we're about to find out.
We've just elected a businessman president, and running a business is the only experience he has had.
The truth is, we don't have much evidence one way or the other. Very few American presidents have had significant business careers before they were elected.
I'm not counting the management of large plantations by early presidents such as Washington, Jefferson, Madison, and Jackson. We have a name for the slave-labor business model. It's called evil.
And I'm not counting show business, either. It's such an oddball enterprise that I'm not sure what lessons you can learn from it. Although maybe The Apprentice will serve as an inspiration for Trump's cabinet meetings the way Bedtime for Bonzo served as an inspiration for Reagan's.
The few presidents who were chief executives before becoming THE chief executive either didn't try – or didn't get a chance to – apply business methods to government matters.
An exception was Warren Harding, editor and publisher of a lucrative Ohio newspaper. Unfortunately, Harding's business method was corruption.
Both Bush presidents had previous business careers. "Bush 41" had done reasonably well in oil exploration, but not so well that he ever earned the West Texas nickname "Gusher George."
As co-owner of the Texas Rangers, "Bush 43" made more than $14 million when the team was sold in 1998. But in 2010, the team was bought by Ray Davis and Bob Simpson for $593 million. Businesswise, W. seems to have left some money on the table.
However, as president, each George faced challenges no CEO ever confronts. No MBA case study prepares you for the Gulf War or 9/11.
And speaking of CEOs, it's interesting what happened when Donald Rumsfeld (ex-CEO of G. D. Searle pharmaceutical corporation) was handed the management of the Iraq War. The merger and acquisition went well, but in the end the stockholders (U.S. occupying troops, Iraqi civilians, victims of ISIS terrorism) were unhappy.
In fact, it's been 88 years since we last elected a president who was a truly successful businessman. The brilliantly entrepreneurial Herbert Hoover was a mining engineer who became a multimillionaire silver, lead, and zinc magnate.
(No wonder Hoover favored "hard money." Although, personally, I'm not sure whether I want a zinc-backed U.S. dollar.)
Alas, things did not work out well for "The Herbert" – the 1929 stock market crash, the Great Depression, etc. Let's cross our fingers and hope for better luck this time.
To be fair, Hoover had been in office for less than eight months when economic disaster struck. It can't have been all his fault. Nonetheless, "Great Depression" is the feeling that comes over anybody who tries to look at the U.S. government as a "business."
In the first place, U.S.G. "Corp." is a monopoly. Don't go trying to start your own government. We settled the question of whether that's a good idea at Appomattox Court House in 1865.
And we settled it rightly. Former Yugoslavia gives us an example of what happens when a country – even a notso-hotso country – splits into lots of little countries.
When it comes to government, one is enough. But that still leaves us with a monopoly situation.
Monopolies are infamous for charging high prices in return for shoddy goods and services. U.S.G. is true to form. We pay the high prices on April 15, and we see the shoddy goods and services in – to name just two examples – the nation's infrastructure and our VA hospitals.
But wait... aren't monopolies also infamous for reaping huge profits? The U.S.G. balance sheet will show a loss of $503 billion this year and has been in the red for 42 of the past 46 years.
U.S.G. is a terrible monopolist. Our government is like a kid playing a game of Monopoly. This player has hotels (in government-speak, it's called "eminent domain") on Boardwalk and Park Place and on all green, yellow, red, and orange properties. He owns (by way of the departments of transportation and energy) the railroads and the utilities. And he has a "Get Out of Jail Free" card. (Keep an eye on Obama's presidential pardons.)
And then what does the player do? He spills an alphabet soup of federal regulatory agencies on the board and stomps on the top hat, wheelbarrow, race car, and Scottie dog tokens of free enterprise. He takes all the Federal Reserve Bank Monopoly Money and throws it out of the playroom window.
Of course, running a business involves more than just minding the bottom line. What about U.S.G.'s executive talent, marketing strategy, and corporate culture?
The popularity of the catchphrase "Drain the Swamp" says everything that needs saying about U.S.G. corporate culture.
A "U.S.G. marketing strategy" is exactly what an election campaign is. And I've never seen a worse one than this year's. If toilet paper were marketed the way American political candidates are, everybody in the country would be using corncobs.
As for executive talent, U.S.G. definitely has some. Surveying the current political scene, I see all sorts of skills and abilities. If I ran a small savings and loan association in Wisconsin, I'd nab Paul Ryan for head teller. Likewise, James Comey, if I were hiring a mall cop.
If I wanted a chief fundraiser for a nonprofit, especially for a ridiculous nonprofit – "Save the Screw Flies" – Bernie Sanders would be my man. If I had a rich uncle who left all his money to a home for stray cats, I'd put Janet Yellen in charge of the trust fund. And if I were looking to brand luxury condo and resort developments... Well, you know who the go-to guy would be.
But U.S.G. is a firm that does business to the tune of $3.9 trillion a year. Heaven knows what kind of talent it would take to run that. You could name all the gods of Olympus as directors and make Zeus chairman of the board and it would be too much for them.
Can President Trump can do some things to make government more businesslike? For sure. Thousands of them. And it's a theme I'll be returning to.
And yet... And yet... "Can the government be run like a business?" Yes – a bad one.
Regards,
P.J. O'Rourke