Buffett Boards the Oil Freight Train


We’re really on a runaway freight train now. I’m talking about the energy markets. Events just keep accelerating. I’d be staggered if oil doesn’t go over US$100 by the end of the year.

Where do we even begin? Let’s start with Venezuela before we get to Warren Buffett’s latest billion-dollar deal. Both point to higher energy prices.

The news is sketchy. It’s probably unreliable as well. But Venezuela’s opposition leader, Juan Guaidó, may be trying to unseat President Nicolas Maduro via a popular uprising.

The New York Times reports[1] that there were clashes between protestors and law enforcement officers in the capital city, Caracas. 

Guaidó appeared with rebellious, heavily armed troops that could be defecting from the regime[2]. He’s calling for Venezuelans to take to the streets and demand Maduro step down.

Is this legitimate or some attempted, CIA-backed coup or media campaign? I have no idea, except to say that the US government is actively coming out in support of the Venezuelan opposition.

Presumably, it won’t be long before they get their man in power.

But the current Venezuelan stalemate between these two opposing forces — and the US sanctions against the government — continue to hurt the country’s oil production capacity.

Look at the decline already. Venezuela was producing 2.4 million barrels a day in 2015. It’s now gone under 800,000 — and could conceivably collapse completely.

Let’s not forget that the US sanction waivers against the other big oil producer, Iran, are due to expire on 2 May. That’s tomorrow. This is tightening the market already.

Not all oil is created equal. Both Iran and Venezuela produce a heavy oil that’s now in short supply around the globe[3].

The US government says you shouldn’t be worried. Saudi Arabia and America can cover any shortfall.

Energy economist Philip Verleger has covered the oil market for 40 years. He says that government officials have assured the world every time there’s sufficient supply at hand when a disruption like this hits.

He adds that the price has got a hefty boost every time — and the world bumbles into the next one none the wiser[4].

That brings us to the Oracle of Omaha. Warren Buffett has seen every one of the 19 major oil price disruptions since the Second World War. That’s one advantage to being 88 and still managing money.

There’s no surprise in that sense that we just got the news that Buffett’s company, Berkshire Hathaway, is prepared to put US$10 billion into energy firm Occidental Petroleum to help fund its bid for fellow oil and gas company Anadarko Petroleum[5].

It’s not a done deal yet. It depends on Occidental winning the bid. But if it goes through, Buffett will earn 8% a year on 100,000 preferred shares.

I wrote an article recently saying that Buffett didn’t get rich being a dumbass. You can see his sharp mind at work here again. Berkshire has an enormous cash balance of US$112 billion to put to work.

If this deal goes through, Buffett will get any upside from the price of oil, plus a very hefty yield compared to most in the fixed income market. The benchmark 10-year US Treasury pays 2.6%. Smart man, that Buffett.

It doesn’t take Einstein to work out that Buffett is fairly comfortable with the price of oil not collapsing if he’s prepared to risk US$10 billion on Anadarko.

The prize of Anadarko is its energy assets in America’s booming Permian Basin. One effect of the US sanctions on Iran and Venezuela is that it clears a path for US exports to win further market share.

For example, the first shipment of West Texas Light is now heading to South Korea instead of their usual Iranian supply[6]. Perhaps this is another motivation for those US sanctions.

All this is pointing to much higher oil prices. The freight train can hardly be stopped now. I suggest you get on board for the ride.

Best wishes,

Callum Newman Signature

Callum Newman,
Editor, Profit Watch