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December 8, 2014

What About The Keystone Bill Now?


How about the price of crude? It’s now down 40% in six months! The oil biz has been knocked on its ass as a result. The oil stocks have been taken behind the shed and beaten with a stick, losses of 20-40% in market cap are common. The fallout (good and bad) from the drop lead in all directions. It might even extend to politics.
The forces that have brought us the big drop have not gone away – the market is looking at an array of factors that could lead to still lower prices. The principal issue is supply – there’s too much oil around in the spot market, the future for global supply has been tipped by American/Canadian production. What’s next? Assume this scenario plays out:

In January of 2015 the new Congress passes a Keystone Pipeline bill. The law then goes to Obama for his yeah or nea. Obama says he will consider this important matter and will make a decision in a matter of days. There is uncertainty as to the outcome. The operating assumption is that O will go through with his oft made veto threat. 48 hours passes – and then this headline  hits the DJ tape:
Obama signs Keystone Bill – Seeks “compromise” on other issues.
Okay traders – What’s your knee jerk reaction? Do you sell or buy WTI on the news? How about Brent? Hit the bid or take the offer? Better yet, how do you think the Algos will react?
Me? I think the headline is, (short-term), bearish for crude. The quick read on this is, “Jeepers! More supply!”
The Keystone Pipeline will not influence supply and demand for a few years. But after that, there will be more global supply of refined products and direct exports of Canadian crude that has not been ‘commingled’ with US crude. The knee-jerk market reaction of ‘lower on the news’ is probably a correct read of the future.
 Agree with that? If so, where does that take us? Say the ‘Keystone news’ results in another 10% leg down in crude. Where does that take us?
The stocks of every company in the oil biz will fall further.  The guys who run these companies hate it when their stock goes down. Most of them have incentive stock options that are already going up in smoke. Even worse, when the stock goes down their ability to do M&A deals is impaired. Issuing more stock when the stock is already in the shitter is always a bad plan.
I’m thinking this through and laughing my ass off. All of the people who were supporters of Keystone now have a very good reason to put it off. Those in Congress who were the biggest supporters were getting financial support from the oil industry. Those same Congressional supporters are now getting calls from Big Oil:
“We’re getting killed already – please, please find a way to put this off for now”. 
The other side of the aisle, who has always been anti Keystone is hearing:
“Look at what cheap crude has done – the middle class is getting a very big boost – we need them in 2016, so lets do this and take the credit.”
The idea that D.C. lobbyist are doing 180’s on this is a comedy. There’s not a tar sands operator, wildcatter, fracker, equipment company, driller, pipeline operator, train owner in the country that wants to see Keystone happen. Go figure.
Note:
I started this with a most unlikely assumption – that Obama would sign a Keystone bill. Based on the past, there is a reasonable expectation that O will veto. But this is the present, and Obama’s views on things have changed.
I don’t think Obama cares a wit about politics any longer. He’s willing to use Executive Action to get his agenda moved. He’s no longer making nice with Reid, Pelosi and Schumer. Obama wants to leave his mark on history.What would he get if he signed off on Keystone?
- O wants to crush Putin. Keystone, by itself, doesn’t do that – but it might help.
- O wants to raise the gas tax and build bridges. When gas is sub $2 he might get support for that.
- Cheap crude means little or no new fracking. O can toss that out to offset criticism from environmental types who are anti Keystone.
- O’s history will be tied to the auto industry he bailed out. Cheap gas is very good for the autos. If gas is $2, auto sales will hit 18+m PA. The demand for auto workers will offset the job losses from those drilling new holes.
- $2/ gallon is a big boost for the middle class. Under Obama the top 10% have done great, the bottom 20% have benefited, but the middle 70% has been shafted. Cheap gas might help them forget they got left out.
- Net-net, lower crude is a positive for consumer’s net disposable income. It will be a net plus to GDP. This increases the likelihood that the next recession (it’s already overdue) will not happen until post 2016. How much would O like that?
- If GDP does stay positive, the US is on a glide path for a budget deficit of 2.5% of GDP in 2016 (to explode a few years later). O starts with 10% and ends with 1/4 of that – legacy material.
- Oh, did I mention that thing about Putin? That’s Job #1…..

Bottom line – The cards in this deck are not aligned the way they were a half-year ago. An Obama veto of Keystone is no longer a sure thing. Proving once again that crude prices have strange bedfellows. 
 About The Author - Bruce Krasting had worked on Wall Street for 25 years--"For 25 years I woke up thinking, "What am I going to do today to make some money in the market". I don't do that any longer. But I miss it." Nowadays, Bruce blogs about his take on financial events at Bruce Krasting(EconMatters author archive here.)   
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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