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Complacency

I think the market is being too complacent about the events in Saudi Arabia over the weekend.

Oil was up some, but the S&P was hardly down at all.  I find it hard to believe that we can have an event of this magnitude, and a corresponding increase to the threat of war with Iran, and add so little risk premium into the market.

I’ve read everything I could about the extent of the damage and it is as clear as mud to me.  But as I tweeted on the weekend, if they really did blow up a bunch of gas-oil separation towers, those aren’t the sort of things that can be ordered overnight. They are likely custom towers that would take at least a month or two to build, if not more.

This word “redundancy” keeps coming up in tweets and in the media.  What does that word actually refer to?  Is it just a placebo word to quell an argument, or are there specific redundancies (other than storage) that will make this a non-event?  I suspect it is more of the former.  Again, if they hit enough of the separation towers, I don’t think there is much that can be done other than to rebuild the towers and get them back online.

The one thing that really did make an out-sized move was high sulfur fuel oil (HSFO).  I think this is because there is the expectation that Saudi Arabia will use HSFO to run their power stations as they divert crude to fill their export requirements.  But then I also just read a Reuters article that said that Asian refiners are expected to get heavy crude instead of medium crude, so it’s all still very uncertain.

At the margin I actually added a little to Crescent Point when it dipped mid-day.  I also took a small position in PBF Energy.  PBF was likely getting hit because HSFO was popping.  They are somewhat more dependent on heavy oil price than other refiners.  But at the same time, yesterday Jason Kenney lifted restrictions on Alberta production if they can get it moving by rail.  This seems to have flown under the radar, but it should increase supply of heavy oil in North America at least.  That, and the expectation that higher oil prices are generally good for refiners, makes me think PBF is worth trading when it gets into the $22’s.

Other than that I was cautious yesterday and added to index shorts.

This reminds me of the chapter in Reminiscences of a Stock Operator when the earthquake hit in San Francisco.  The market did not react right away.  It was a bull market.  There was too much positive energy to digest such a negative event immediately.  It took time for the market to realize what had just happened.

I don’t understand how we can have this big of an event and it is a non-factor to the market.  I believe the oil market still matters.  The Middle East still matters.  We’ll see if I’m wrong.

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