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Cars, Potato Chips, and Oil Fortunes Run Amok

Posted January 15, 2018 at 7:00PM

A few months ago I picked up a 2010 Ford Mustang GT. It’s a Kona blue convertible with saddle leather interior and 15,000 miles on it, and it goes off the line to 60 in 4.9 seconds. It’s a nice ride that gets about 19 miles to the gallon.

Over New Year’s, I found myself at one of these exurbia McMansion parties talking to a guy whose family made a fortune in potato chips, of all things. Standing between the whitewashed furniture and the gas fireplace, we were talking cars.  

“In 2008,” he said, punctuating the air with a carrot stick, “I walked into a Ford dealership looking for the biggest, baddest Mustang they had, which was the Bullitt tribute car.”

“You have to remember, at this time gasoline prices were around four-something a gallon. The sales guy couldn’t believe I wanted a V-8 Mustang. He said I could have $3K off the top of any one I wanted. Furthermore, he told me it was likely one of the last years they would make a muscle car, as they were impossible to sell.”

Well, here it is a decade later, and F-150s are flying off the lots like a bat out of hell, and the 707-horsepower Dodge Challenger is in its third year of production. In fact, the auto sector has sold over 17 million cars in each of the past three years — a record.

The point is Americans have a wonderful ability to believe that the current state of the oil market will go on forever... when in truth oil prices are incredibly unstable.

Just look at this 10-year WTI chart:

EAC_1.16.18_WTI

In 2012, I wrote that the price of oil was going to $33 a barrel, and I was scoffed at. It ended up bottoming in the mid-20s.

Two weeks ago I wrote that on the technical side, oil was going to $105 if it broke above resistance. And, as you can see by the chart, it did.  

Today, West Texas Intermediate (WTI) is trading at $64.81 a barrel. Brent is at $70.15, and Urals is at $66.69. Western Canadian Select is trading at $38.70.

That’s the technical argument.  

The macro argument for bullish oil is two-fold. One, Saudi Arabia needs, wants, and will have higher oil prices if it has to cut production to zero. The current leader, Prince Mohammed bin Salman, has the tiger by the tail after locking up all of his rivals, going after the clerics, getting bogged down in a bad war in Yemen, and letting women drive.

His only escape is for the Saudi Aramco IPO to go off at a high price point and refill the Kingdom’s coffers. This is expected to happen in the next two quarters and be priced at $1.3 to $2 trillion, making it the largest public company on earth from the get-go.

Of course, all the Wall Street nabobs will line their pockets with the IPO, so they have every incentive to push oil higher.

A new report from BMI Research says:

Although the analysts estimate that OPEC holds around 2.19 million bpd of spare production, they suggested that it wouldn’t make sense for the countries that hold the largest share of this spare output to increase their supplies.

We see a low probability that Saudi Arabia will move to significantly increase its output. Such a move would collapse the production cut deal and would be heavily bearish for global oil prices. This is not in the economic or political interests of the kingdom.

What the Frack

The second bullish factor is the U.S. frackers. Many people believe that high oil prices mean they will just start pumping. The problem is many oil companies still aren't making money despite the higher oil prices.  

Many frackers will never make money. Many sold their production forward at a lower price. Furthermore, those companies that are somehow making money are more concerned with lowering debt than expanding production.   

It was a long, hard slog in the oil patch over the past few years. Many banks will be reluctant to lend if the investment is not sustainable.

All the best,

Christian DeHaemer Signature

Christian DeHaemer

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Since 1995, Christian DeHaemer has specialized in frontier market opportunities. He has traveled extensively and invested in places as varied as Cuba, Mongolia, and Kenya. Chris believes the best way to make money is to get there first with the most. Christian is the founder of Crisis & Opportunity and Managing Director of Wealth Daily. He is also a contributor for Energy & Capital. For more on Christian, see his editor's page.

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