- Oil producers are going to foot the bill for President Trump’s tariffs.
- Producers’ shares are down as much as 41% this year.
- As the trade war drags on, this could get worse.
- It’s time to protect your portfolio.
The wheels are coming off down in Texas. Producing oil in the Permian Basin just got more expensive.
If you own oil producers in the Permian Basin, it’s time to get out.
Permian Basin producer Concho Resources wrote down its shale acreage by $900 million. That, combined with a bad quarter, sent its shares down 38% in six days.
That should be a wake-up call for investors still long the shale producers — because it’s only going to get worse.
Here’s what you need to know to protect yourself.
Shareholders Pay for the 25% Tariff on Steel
According to online energy industry publisher Hart Energy, Plains All American Pipeline will begin to charge users of the Cactus II pipeline an extra fee. That’s to cover the cost of the imported steel.
Plains is a company that owns and operates pipeline infrastructure to transport crude oil, natural gas and liquefied natural gas.
Its Cactus II pipe system runs from the Permian Basin of Texas to the Gulf of Mexico.
The steel is subject to the Trump administration’s tariffs. And contrary to popular belief, a tariff is a tax paid by consumers.
In this case, the 25% tariff on steel cost Plains an extra $40 million on its $1.1 billion pipeline.
It cost so much extra to build the pipeline that Plains will charge an extra $0.05 per barrel. The pipeline can handle 670,000 barrels per day, so that works out to $33,500 per day.
Even at that rate, it’ll take the company over three years to recover the money lost to the tax.
Ultimately, the oil producers are going to foot the bill. And if you own stocks in the oil producer sector, you’re responsible for that tariff too.
2009 Shale Boom: Texas Added 4 Million Barrels per Day in 10 Years
The Permian Basin is the heart of the U.S. shale revolution.
Oil production in Texas rose to 4 million barrels per day from 2009 to today. This drove total U.S. oil production up to 12 million barrels per day.
You can see what I mean in the chart below:
This is a chart of the shale boom. Back in 2007, total U.S. oil production was under 5 million barrels per day.
Texas alone added 4 million barrels per day. That almost doubled oil production in the U.S. in just 10 years.
The increase in oil production is too much, too fast.
And it’s the reason oil prices fell from $145 per barrel in July 2008 to $26 per barrel in 2016.
It’s a critical part of the U.S. economy. But it has some flaws.
You see, the biggest problem with the Permian Basin is that there aren’t enough pipelines to get the oil to market.
That means the oil coming from the Permian gets a lower price than oil coming from places such as the Gulf of Mexico, Oklahoma and other parts of Texas.
This year, the discount per barrel was as high as $6. That means that Permian Basin producers would get $6 less per barrel than the spot price.
To put that into perspective, if the spot price per barrel is $55, then the Permian Basin would get $49.
It’s currently around $3.89 per barrel. And with West Texas Intermediate crude oil prices crashing down near $52 per barrel today, Permian Basin operators feel the pinch more than others.
This contributes to the falling share prices in the sector.
Gloom in the Oil Production Sector Will Continue
The drop in share prices already priced in too many operators. And it’s not just Concho … shares of independent giant EOG Resources fell 41% from $132 per share to $77.55 in less than a year.
Another Permian darling, Diamondback Energy, saw its shares cut by 32% over the same period.
And things will continue to get worse.
The steel tariffs are part of the larger trade war between China and the U.S. As that drags on, the outlook for global oil demand looks uglier.
That’s why oil prices are back down around $50 right now.
When you subtract the discount and slap on a per-barrel charge for the steel tariff, you are right at the breakeven point for many of these Permian Basin oil producers.
That’s what caused Concho’s collapse. And there will be others before this is over.
This is a part of the market that I love, but when the trend is against us, we have to get out.
Editor, Real Wealth Strategist