On Friday I was called to go on MSNBC to discuss the possibility of a US ban on Russian imports of oil. Last minute, I was pushed into doing the hit from my home office, and looked admittedly a mess. My dishevelment brought more interest than the content I was telling Chris Hayes, unfortunately – and it was very important stuff I was trying to say.
I think Chris was interested in hearing what a US ban might do to gas prices – an obvious question I chose to overlook when answering. They’d go up. More – much more – important to me to express was what the possible effect a US ban on oil might have on Putin and the Russian economy. I was perhaps overexcited on air to explain how monumentally effective an oil ban would be to accelerate the economic pressure that could be brought to bear on Russia.
And, clearly, economic pressure is the only kind of pressure available to the West – anything else would be incredibly irresponsible and playing into Putin’s hand to make this about Russia vs. the US. This Ukrainian exploit is most certainly not about that.
US imports of oil from Russia are not significant – maybe 300,000 barrels out of a total of 17-18 million barrels the US uses each day.
It would be natural to ask – then why should it matter? And – why should our gas prices go up if these barrels are so few?
First, oil is a global commodity – whatever happens in the world, whether in Iraq, the US or Ukraine – if it affects oil supply or demand in any way, it affects oil prices EVERYWHERE. That may be unfair, but that’s the way it is.
Secondly, banning 300,000 barrels a day of the 9 million barrels that Russia sells can surprisingly make a huge difference, despite being a very small percentage. I have been in oil for 35 years and I have no illusions about stopping any oil producer from selling oil – particularly in a worldwide fossil fuels supply shortage like we have now. Petrodollars flow. No matter what else is happening in the world, petrodollars flow.
But the signal the US sends about making Russia’s #1 export more difficult to sell – that makes an enormous difference. If the US won’t buy Russian oil, it signals that it will use the absolute sharpest arrow in its quiver to economically stifle Russia. Further, it signals that it will support and help other countries to join the reduction of Russian oil and gas imports. And every barrel that isn’t sold on the traditional, financially recognized markets must go somewhere else – somewhere dark – to find a home.
It all gets sold, of course. To China, to India, to European oil companies, all of whom are however only willing to buy at a deep discount – (despite the moral calculus – shame on you Ben vanBeurden!) Traders don’t want to touch the stuff. To further complicate the deals, the financial transfers for that oil become necrotic, because the regular market and banking system has been slammed shut by other sanctions.
Yes, it all gets sold – but it’s made more difficult, it’s curtailed, the cash flows slow like molasses. Do that with 30% of Russia’s oil and gas supplies, and you’re really hurting the Russian economy where it counts. Oil and gas revenues are fully 40% of the Russian economy. Putin must have it – the tanks rolling in the streets of Kyiv were bought with Euros, as were those monster oligarch yachts that have been recently targeted. Curtail oil and gas revenues to the Russian economy and the sanctions don’t take years to make themselves felt – they’ll only take months.
I am heartened that for once, money and politics seem to have been pushed down the priority list to support Europe. It is an incredible act of bravery for the Biden administration to talk about banning Russian oil. They know it will lead to higher gas prices for the American people.
High gas prices are a political nightmare, and with midterms approaching, the Biden folks are willing to commit a bit of political suicide to stand with Ukraine and the more important priority of standing against Putin and his authoritarianism.
And three cheers for the oil companies who are standing firm (at least for now) – particularly BP, Exxon and Total.
Of course, you are going to want to know what to do with $125 oil in terms of oil stocks investing. I’m coming to it.
I have seen wars roil oil markets unfortunately often in the 35 years I’ve been engaged with these markets. There is no top to be called, not when markets begin their parabolic climb. But there is also no good reason to buy oil stocks here – any piece of news that might show even the slightest diplomatic possibility of solution will crash oil markets overnight. There are, however, lots of reasons to sell a portion of your position if you are already long. If you want some confirmation of the wise guys who’ve taken this strange ‘opportunity’ to get out of some really bad oil stocks at a premium, check this report on Carl Icahn and Occidental.
I’ll go into more (obviously explicit targeted) ideas in the subscriber letter tomorrow. But the big move to make if you have oil stocks that are going parabolic is to take some of that cash out and wait for some things to settle – the futures prices on oil are NOT REPRESENTATIVE of the current supply demand fundamentals that are currently out there. Russian oil sales are not being halted, they’re being curtailed. There has been zero loss of supply in the global market yet – and likely won’t be (more likely to see some marginal supplies start to appear). The consolidated Euro action has been to also USE LESS and this will help the balance, even if they can’t afford to buy much less.
The other big move is to continue to find natural gas investments if you cannot stand to be without exposure, particularly LNG. I am convinced that these stocks won’t drop much at all, even from these lofty levels, no matter the length of the conflict in Ukraine.
Again, more color and targets on those ideas tomorrow in my subscriber newsletter.
If you’re not a subscriber yet, maybe now’s the time to join – only $25/month.
that’s all for today
dan@dandicker.com
that’s all for today
