OPECalypse - March 29, 2015

Steve McDonald: Hi everybody, I'm Steve McDonald. Welcome to the Market Wake-Up Call. Our guest this week is Sean Brodrick, and he's here to make sense out of oil prices for us, aren't you? Sean Brodrick: Yes, I am. Steve McDonald: How have you been? Sean Brodrick: Well, I'm actually doing okay. Oil prices, you know, there are plenty of producers – Steve McDonald: Hey, I'm asking questions here. Sean Brodrick: [Laughs] Steve McDonald: What is going on? These things are all over the map. One day they're $53, down to $44, back to $48... Sean Brodrick: Well, you have to understand, in the short term, speculation can really push prices around and the U.S. because oil is priced in dollars. Longer term, there's a lot of supply on the market, and that's what's really weighing down on the price of oil. Steve McDonald: Supply. Sean Brodrick: Yes. Steve McDonald: What about production? I mean – Sean Brodrick: Well, I mean, it keeps rising every single week. Steve McDonald: I know. Sean Brodrick: We're up to 9.41 million barrels per week right now, and that's – even though the number of oil rigs has dropped off the face of this Earth. Steve McDonald: It's off 60% at this point. Sean Brodrick: Yeah, yeah it is. Steve McDonald: So if there's a spike in demand or an interruption in flow, what happens with the price? Sean Brodrick: Well, then it could go higher, but we also have to remember there's the international oil price and the U.S. oil price. The international price could spike if one of those troubled countries – say Venezuela, Libya, you name it – has another catastrophe, and so their production comes off the market. Here in the U.S., though, we have plenty of oil. Steve McDonald: OPEC and the U.S., the relationship. It's been in place since, what, the Nixon years? Sean Brodrick: It has, ever since we started the petrodollar. Steve McDonald: That's right. The petrodollar still exists? I didn't know that. Sean Brodrick: It still exists. It is actually one of the fundamental legs supporting the U.S. dollar as the international reserve currency. We've had this cozy relationship with OPEC for years. They needed us for protection, we needed them for oil, but that relationship is breaking down now, and as it breaks down, that could send shock waves throughout the entire global financial system. Steve McDonald: Well, who's – if it's not going to be the U.S. and OPEC, who's it going to be? Sean Brodrick: Probably China. Saudi Arabia and – Steve McDonald: Okay, you're saying China is going to defend Saudi Arabia? Sean Brodrick: China is building up its military like you wouldn't believe. They don't spend nearly as much on the military as we do, of course. We are No. 1... 2, 3, 4, 5, I believe, at this point, but China is now No. 1 for oil buyers of all the oil coming out of Saudi Arabia. They are buying more and more all the time. It's in their interest to step in and start to do things for the Middle East because they get so much oil from there. For us, you know what, we're actually producing a lot and we don't need Middle East oil nearly as much as we used to. We still import oil, but we don't need it nearly as much as we used to. Steve McDonald: So is this going to become the petroyuan? Sean Brodrick: There is that potential, yes. I'll – Steve McDonald: Never. Sean Brodrick: Oh, you don't think so? Steve McDonald: No, they manipulate it too much. How are they going to price oil in a manipulated currency? Sean Brodrick: That's a great question, and in fact, we can look at what they're doing to make their currency a more convertible currency, and also, to make their currency take the steps forward to make it a world reserve currency. Once they do those things, then you can look at something like the petroyuan. Steve McDonald: Okay, so what does this mean for investors? What do our people do now? Sean Brodrick: Well, there are plenty of things you can do. One thing you might want to do is, the U.S. dollar's had a tremendous run. You might want to look into investments that protect you if the U.S. dollar keeps pulling back. It had quite the plunge recently and it could go a lot lower. And also, you can look at investments that will do well as the Chinese currency becomes stronger. If the Chinese unhook their currency from the U.S. dollar and if they say, "Stop buying so many U.S. Treasurys," we could see a real shift in the global fundamental financial balance. The world won't need as many U.S. dollars and they'll start to need more yuan. So those companies that have costs in U.S. dollars but they bring in money in yuan, those companies will do very well. Steve McDonald: All right, let me summarize. You're saying that fracking is going to cause a breakup of the U.S.-OPEC relationship, we're going to detach from the dollar and use the yuan to price oil, and all because of the Marcellus Shale and fracking? Sean Brodrick: No. That's only one of the things that's actually in this – actually, the biggest thing has to be the U.S. spendthrift ways. We have spent ourselves into a corner – Steve McDonald: Oh – Sean Brodrick: – and the Chinese are just sick of it, you know, because they're the ones holding all those Treasurys, but it's like they keep writing checks to this crazy cousin that takes the money – [laughs] – and blows it month after month after month. If you had any sense of financial – Steve McDonald: How many Cadillacs can you wreck? Sean Brodrick: Right, exactly. [Laughs] Steve McDonald: Really. Sean Brodrick: So they have to think about their long-term health as an economy, and that's why they're taking these steps, starting to make their currency more convertible, starting to become a world reserve currency. They're moving along that path, and our relationship with OPEC, you know, I mean, it was so cozy for a long time. We needed them; they needed us. We don't need them as much anymore. They're flailing around looking for someone else who they really could use to protect them and do stuff. At the same time, China's building what they call the "New Silk Road," which is this big economic channel all the way from China through India, on to the Middle East and Europe, and so they're really trying to get things more focused on them. It's in their best economic interest to do so. And so again, this could really shake up the whole financial landscape all around the world. Steve McDonald: And I thought the oil boom was a good thing. Sean Brodrick: It is a good thing in many ways. Steve McDonald: Well, it sounds great, yeah. [Laughs] What, no war? Sean Brodrick: You just have to remember: change is not always calm and it's not always even, and – Steve McDonald: It's not always positive either. Sean Brodrick: Well, no, and so when these big changes come, things get shaken up and it can be quite hard to actually ride these things out with all the stuff going on. You should look at taking some more defensive stances against things that could be really hurt if the U.S. dollar goes down a lot. Steve McDonald: Well, there you have it. Pay attention to China, OPEC, the U.S. dollar and fracking. I don't know if I should thank you for being here this week. I'm a little depressed. [Laughter] Sean Brodrick: No, don't be depressed. Look, even though the world looks scary, we're all going to be fine just as long as we keep following the advice of people in The Oxford Club. Steve McDonald: And stop wrecking Cadillacs. Sean Brodrick: And stop wrecking Cadillacs, yes. Steve McDonald: Well, that's it for this week. For everybody here at the Market Wake-Up Call, I'm Steve McDonald. Thanks so much for being with us. Sean Brodrick: Thanks for having me here. Steve McDonald: And thank you guys for being with us. I'll see you next week. [End of Audio]