by Gavin M.
I know it's been awhile since I wrote something on here. I do what I can when I can. So let's get to the real picture of what's happening in oil. It isn't a surprise that oil has plunged more than 50% in the last 9 months and the drop was precipitated by plunging demand and higher production numbers. After all, the shale boom was supposed to bring AMERICA back to the forefront! After years of 'prosperity' we finally have reached the stage of where we have the ability to produce enough to not really need as much OPEC oil.
Enter the dilemma that we all face. In a world that may or may not have put in place mechanisms to take into account North American shale oil, we have a price (production?) war with OPEC. The unfortunate disadvantage of being here in the West is that our cost of living is higher. Saudi et al can afford to hire cheap labor from India, Bangladesh and other Asian countries. Those folks have engineers and technical personnel that will happily take $2,000 a month as salary. Your average redneck American will just laugh at that measly salary. Most oil workers, especially the North Dakotans, make $80,000 to $150,000 a year. That roughly translates to an average of $5,500 a month.
Take into consideration the cost of equipment and everything else here in the US and you'll see how costs here are 5X as much as they would be in Saudi, Oman, Qatar and wherever else out there. If an oil worker dies or gets injured, companies in the west have to compensate. If that happens in Saudi, they just fly in a new Indian guy. Say that I am crazy but this is true. It is a matter of scale and it is a matter of standard of living. So it boils down to really this: If you're an oil company, who would you rather keep? You have two guys: one takes $5,500 and the other will do the same job (if not better) at $2,000. If I was the CEO, I'd take the second kid!
I will not bother you with charts and graphs justifying how Saudi can be still profitable at < $50 oil. You can definitely check out Zero Hedge's site for all of that great information. So with all of this, the unfortunate result is: massive layoffs in the US and other countries where they can afford to trim the fat. Oil companies are scaling back projects and even going as far as cancelling them until market conditions are favorable. The ripple effects are catastrophic. You have contractors like Schlumberger, Weatherford, Halliburton, Cameron and other EPCM companies that get hit because in this world, no projects mean no jobs.
Lo and behold some of these companies' charts:
HAL at its peak last year hit $72. I know because I was patiently waiting for a TOP to settle so that I could short the darn thing. XOM presented a nice Double Top there for people to also short. But I digress. So, imagine if you were one of those employees getting laid off by any one of these oil companies. You get your pink slip one day. Or if you are an older fella, you get your papers to force you to retire early, complete with severance packages. Why do I know this? Because my dad is one of the casualties of the oil plunge. He's one of the regional managers of a contractor company and he get his golden parachute as they say.
So here you are, without any thought of the markets. You spent your entire life working for Schlumberger or Weatherford and bam! you get your termination notice. What do you do? You can't do anything else because you have lived, breathed, dreamed and worked oil all your life. What do you do with your company given shares now? They were half what they were worth back around the same period in 2014. This is where they add insult to injury. You got laid off, and your stocks aren't worth what they should be. This leaves you with a lower payout and severance.
Fortunately for my father, I told him to "SELL Mortimer SELL" back when their company's stock was near or close to the peak. I recall vividly how he got mad at me for telling him to sell when it went up $5 later. Little did he know that last $5 push to top was the high of 2014. He later apologized and praised me for telling him to sell when 99% of his colleagues brushed him aside and ridiculed him for letting go of his shares when they could've been higher. And now those same people are crying because they are down on average $25!
This is the reality of the majority of oil workers in the west right now. They are getting laid off, they are taking home less because of the plunging stock prices and what's even worse - there are no comparable jobs for them to take. Unless they're happy to take a job at TJX or Ross stores for $9 bucks an hour, then that would work. But what a lot people may not know is that the oil workers are a very spendthrift bunch. They buy their ATVs, their RVs, their boats and their BIG trucks all on credit. When one day that job is gone, what happens?
As a trader I make money regardless of where oil prices go up and down. I suppose I get the unique perspective of warning my family, friends and my clients of impending dooms. However, some may dismiss me as a hack. Unfortunately, for most Americans they have NO clue of what happens. They just look at the indexes every day and when they see GREEN they just remain happy with their own lives.
The point that I am trying to make here is that when significant market events happen, traders capitalize on it but the bigger impact hits a lot more people socially. These jobs will undoubtedly come back but at what cost and for how long? Regardless of whether you're a trader or not, your ignorance of the markets does not excuse you from learning about how the global economy functions. Everything that happens on my side of the futures markets impact the stock markets.
And for those of you stuck with stocks that lost 30% of their values, well, you can have FAITH on the US FED and the army of Central Banks that promise to have your back or you can learn a bit more about what is really happening and make an educated guess on what to do with your positions. As for me, I have always been in cash since 2013.
Buying on a good strategy may sound a little stupid for some but buying on faith is much worse than throwing money into a bottomless pit. Trade (tread?) carefully my friends.....
Traders from Equity Sense will be writing on this blog on positions and other market-related things.