It's a Mad, Mad, Mad, Mad Energy Market

Not surprisingly to many investors, prices in oil continued to drip lower as the new year passed its first week.

On this episode of Industry Focus: Energy, Sean O'Reilly, Taylor Muckerman, and Tyler Crowe talk about Saudi Arabia's recent moves against Iran and how they're affecting oil prices worldwide; data that's come out about surplus inventory numbers and what we can expect in the future; why a billionaire activist investor removed the CEOs from three energy companies, and why sales of gas-guzzling SUVs and trucks have bust through the roof in the past year.

A full transcript follows the video.

This podcast was recorded on Jan. 7, 2016.

Sean O'Reilly: Oil is tumbling again. But look on the bright side: gas is $1.90, on this energy edition of Industry Focus.

Greetings, Fools! Sean O'Reilly here at Fool headquarters in Alexandria, Virginia. It is Thursday, January 7th, 2016, and joining me to talk all things energy and materials is Tyler Crowe and Taylor Muckerman. Happy New Year, guys!

Taylor Muckerman: Happy New Year to you, too!

Tyler Crowe: You too.

Muckerman: We're back in the studio.

Crowe: Back in the studio after a couple pre-recorded shows.

O'Reilly: I forgot what you guys looked like, actually. I was like, "Who are these guys?"

Muckerman: You mean you didn't watch our videos over the holidays?

O'Reilly: No, I didn't.

Muckerman: Oh, OK. That's messed up.

O'Reilly: Well, I was present, so it wasn't anything new. So, did anyone do anything cool? You didn't ski? Tyler?

Crowe: No, man. It's really been a warm east coast, there hasn't been a whole lot of options available to us.

O'Reilly: Knowing you, I just assumed that you would find it, if it could be done.

Muckerman: Charif Souki's finding it.

Crowe: Yeah, he's got plenty of time to talk. We'll get into that later.

O'Reilly: So, diving right in here, it's been a pleasant year so far in the energy sector, hasn't it, guys?

Crowe: Oh, it's great. Absolutely wonderful.

O'Reilly: Oil went into the holidays at the 30s, it's actually now at new lows. I think $32.50 was the low today, I think it's up a little bit now. Kind of a dismal start, so we pretty much have to talk about it. Why is this happening? I thought we were at the bottom last year.

Muckerman: We're always at the bottom. Until we're always at the top.

Crowe: Yeah, you always love those qualifying statistics like, "Well, this is the worst three days to start a year. It's not the first three days ever, it's just the worst the days to start a year." It's like, well, OK, whatever.

Muckerman: Pick a day and time and find a stat.

Crowe: Yeah. "This is the worst third Tuesday in a month for ... " I don't know how long. But there's just so many of those that are just fascinating. Or stupid. I don't know what you want to call it.

O'Reilly: Didn't the slide start when Saudi Arabia and Iran cut ties? Wasn't that when things started sliding again?

Muckerman: It's tough to really pin down when they stared, when they stopped, and when they kept going. Typically, you would imagine that--

O'Reilly: Well, you were talking before we were on air, and I wanted to segue to the chart you're looking at with terror and all that stuff.

Muckerman: So, basically the reason it's sliding that people are saying now is that Saudi Arabia is like, "You know what Iran?"

O'Reilly: "We don't like you!"

Muckerman: "You're coming online and we don't think you're going to be able to do it because we're just going to sell it to Europe at a very steep discount." So, they're basically undercutting Iran, rather than a military action against them. They're just basically saying, "Up yours, we're going to cut prices, specifically to the people that you're most likely to sell to."

O'Reilly: And the market is taking this as basically, the odds of OPEC coordinating .. they were really low before, but now, it's like not even possible. The reason oil's falling is that, after Saudi Arabia and Iran cut ties, people are like, "There's no way OPEC is going to even talk to each other now."

Crowe: There's so many reasons why oil's going down. So, there's that. Everyone thinks OPEC is losing their minds, a herd of cats that's going to go off and do its own thing.

Muckerman: Well, these are, arguably, the two most powerful countries in OPEC. And they were never very amiable to begin with, and then you go off and behead a foreign national from Iran ...

Crowe: And then, you've got inventory data where people are losing their minds over inventory data, and all of these things, everybody's losing their minds after watching China's stock market fall over the past few days, going, "Oh, China's falling into a pit of despair."

Muckerman: We need an oil circuit breaker.

Crowe: Yeah.

O'Reilly: Yes, perfect.

Muckerman: We need a circuit breaker for oil price sell-offs.

O'Reilly: Crowe and I were talking earlier, like, the Chinese circuit breaker for their stock market it's basically a self-fulfilling prophecy, because when it falls to like, halfway down to where the circuit breaker would kick in, everybody is like, "Oh, it's going to happen."

Muckerman: And then they sell out because they're scared.

O'Reilly: And then it happens, because they're think it will.

Crowe: Well, luckily, today, they got rid of it.

O'Reilly: Yay.

Crowe: Yay. We'll see what happens with that.

Muckerman: Until tomorrow, when they reinstate it.

O'Reilly: Yeah. It's like, "We're just going to stop all trading forever! We don't like the stock market anymore!" Tyler, I asked you yesterday about the oil inventory thing. I saw the release of crude oil inventories, and it was down 5M barrels, and I was like, "Oh, that's awesome, good for them." But then gasoline was up 10M barrels, and apparently that's bad, and I didn't even know about it.

Crowe: Yeah. So, I think, this week, we had like, a 5% move in oil. And the biggest reason that anybody could come up with was the fact that gasoline inventories in the United States had gone up by 10M barrels after the week's previous data that said that crude inventory barrels were down 5%. So, everybody got a little excited, like, "Yay! The turn's starting to come!" And then they saw gasoline inventories up.

O'Reilly: What does that mean?

Crowe: Well, let's just keep this in a little perspective here. We'll say down 5% in crude, up 10% in gasoline. So, we're net up 5%.

Muckerman: Until that gasoline turns into CO2, it's basically an oil stockpile.

Crowe: Yeah, it's some sort of petroleum stockpile. So, we're net up 5%. The United States burns through 15M barrels a day of gasoline, diesel, anything that's made out of crude products. So, we had an inventory build of eight hours' worth of consumption, and the market drops by 5%.

O'Reilly: That's insane. Arguably. 

Crowe: It's one of those things where it's a law of large numbers, where people say, "Oh, we had an inventory gain of 10M barrels," and when you have 10M barrels, it's like, "Holy cow, that's a lot of oil!" But when you put it in perspective of how much we consume or produce on any given day, it's not even half a day's worth of consumption.

O'Reilly: Right. So, supposedly, we are over supplied in inventories by, what, 2M, 3M barrels?

Crowe: Something like that.

O'Reilly: That's a couple months, right?

Crowe: That's the hope. Long-term focus, decline rates are happening. There's lack of investment.

Muckerman: SandRidge delisted.

Crowe: Did they?

Muckerman: They did.

O'Reilly: They're pink sheets now, right?

Muckerman: Yeah, it's in the process of being delisted. So, big names are falling.

Crowe: Production budgets are going down, it's not reinvesting, decline rates are going to happen, and when it finally catches up ...

O'Reilly: For our listeners who may not know, real fast, what's the decline rate?

Crowe: Decline rate is the natural decline of a well where, once you put a well in the ground and it starts to produce, there is a fixed amount in that reservoir, and the rate at which it leaves, the pressure, the physical properties of that, will deplete, and it means that the rate that's coming out of that will decline.

O'Reilly: It's like, when you're emptying a pool, that last bit of water does not come out fast.

Muckerman: Imagine a super-steep water slide you're scared to go down at a water park--

O'Reilly: That I'm still afraid to go down.

Muckerman: --that's the decline of most frack wells, where it's like, vooosh!

O'Reilly: It's like 70% or something.

Crowe: Yeah, 70% in the first year.

Muckerman: It's a frightening decline rate.

Crowe: So, ask that decline rate happens, production will slow down, and demand will start to come in to that equilibrium, maybe demand will outpace for a little while. And prices will rise. We don't know where that balance is going to be found again--

O'Reilly: Have you seen any estimates? I think we peaked out at like 9.6M barrels a day in the U.S. for production, I think we're down to 9.1M. Have you seen any estimates where we'll be at the end of--

Crowe: No.

O'Reilly: Okay. No big deal, I was just curious.

Muckerman: If we did ...

O'Reilly: "I'm gonna put in a million dollars!" Actually, let's shift from the supply side to the demand side. What were you saying about SUVs before we came in here, Tyler?

Crowe: Well, I'm not saying it. It was actually, a lot of reports are coming out. As of late, a lot of the major auto manufacturers are starting to report their November and December sales for the end of the year, and I think maybe to the surprise of few, SUV sales are absolutely booming.

O'Reilly: Because gas is $1.90 for the first time in five years or whatever.

Crowe: Yeah.

Muckerman: Long-term investing!

Crowe: On Bloomberg this morning, there was an estimate that $100M or $100B has been transferred to the customer through gasoline savings over 2015.

O'Reilly: I think it was like $600 per household or something.

Crowe: Yeah, it's a lot of money, and it's just basically being put into other things, and one of the things it looks like people are going to buy now are SUVs. Going over the big three, doing a comparison of cars versus trucks. In 2015, Fiat (FCAU), General Motors (GM -0.91%), and Ford (F -3.01%), their truck and SUV brands grew 22%, 16%, and 8.3% respectively.

O'Reilly: That is white-hot for cars.

Crowe: Now, let's compare this to their cars, sedans and smaller vehicles. Same thing, Fiat, General Motors, and Ford. Fiat Chrysler is cars down 19%, General motors down 14%, and Ford down 0.9%.

O'Reilly: People are buying trucks instead of cars.

Crowe: Exactly.

O'Reilly: My god. What's the average MPH for a truck these days?

Muckerman: Not as good as a car. 

Crowe: But, I mean, we're looking at somewhere in the high teens to low 20s. And just running a number on it -- and I hate doing this, because it makes it seem like I'm kind of belittling the movement to hybrid and electric vehicles and things like that--

O'Reilly: Which, of course, you would never do.

Crowe: I don't want to do it because I think it's going to happen. The technology is going to come up one day, it's just not quite there yet. But just to get a little bit of perspective on growth rates, if we were to combine the large pickup trucks, the largest and most popular, Ford's F-150 series, Chevy Silverado, and Dodge Ram -- for every one Tesla (TSLA -5.59%) that was sold last year, there were 83 of those trucks sold.

O'Reilly: Oh my god.

Crowe: Just giving a little perspective.

Muckerman: Where you at, Elon Musk? Step it up.

O'Reilly: Step it up.

Crowe: Just to give a little perspective about, when we talk about growth rates.

Muckerman: Well, there's also more scale to sell. Elon Musk is pretty much tapped out, doing what they can sell. They have more capacity to build into their factory, but right now, they're running at pretty peak rates.

O'Reilly: Does anybody know off the top of their head how many cars Elon Musk sold in the fourth quarter or third quarter? Wasn't it like 25K or something?

Muckerman: In a quarter? No.

Crowe: Annual was 50K, I believe. I may be a little low on that, don't quote me.

Muckerman: Yeah. I think they're shooting for 500K out of that factory.

Crowe: Within a couple years.

O'Reilly: And millions of trucks are being sold right now. Before we move on, I wanted to point our listeners to with the newly redesigned focus.fool.com. There, you'll discover a special offer to join The Motley Fool's Stock Advisor newsletter for all Industry Focus listeners. All loyal IF listeners have access to a special discount on Stock Advisor that works out to $129 for a full two-year subscription. Once again, that's focus.fool.com.

Our last story of the day: Carl Icahn, everybody's favorite billionaire corporate raider, gave himself some Christmas presents.

Crowe: Hey, he's an activist investor, not a corporate raider.

Muckerman: Corporate raider is so 1980s.

O'Reilly: Sorry. I loved "Barbarians at the Gate," I'm sorry. I actually read that, it was on my reading list. Anyways, he's basically kicking out founders left and right at these energy companies.

Muckerman: I guess, the people he gets puts on boards are kicking the people out. His mercenaries are doing it for him.

O'Reilly: He's doing it by proxy.

Muckerman: Exactly. But, these guys aren't necessarily leaving empty handed. Jim Bob Moffet, $16M payout, with $1.5 per year consultant fees.

O'Reilly: He's from Freeport-McMoRan (FCX 1.11%).

Muckerman: Yes. Co-founded with two other guys McMoRan Oil & Gas.I guess they merged with Freeport Minerals. Then, they remerged a couple years ago. And now, they're not investing in oil or gas anymore for the foreseeable future. The company's been through more flux than pretty much any company I can think of in the energy space.

Crowe: You might want to put Cheniere Energy (LNG -1.50%) on there, too.

Muckerman: Yeah, that's true.

Crowe: You go from an oil and gas producer to a natural gas importer to a natural gas exporter in a matter of 15 years ...

Muckerman: Well, basically attempted all three and hasn't done any yet. 

O'Reilly: Effectively.

Muckerman: I don't think he imported any natural gas.

Crowe: They do. They have a couple contracts that have helped put a little cash on the books to fund the exports. But yeah, it's been a terminal that never met its capacity.

Muckerman: Yeah, they never found anything when they drilled, and they're still get to export. That being said, I'm a shareholder. So, maybe I'm kind of glad that they'll take the cash and maybe sit on that for a little while, rather than what he was hoping to do, doubling the amount of trains they have by 2025. They have seven coming online now, and he wanted 14 by 2025. A bit ambitious. And obviously, the board felt that way as well.

Crowe: Yeah. At the time, with what Cheniere Energy's existing plans were -- we talk about their savings path and their Corpus Christi terminals -- the amount that they would process with that is equivalent to about 10% of U.S. natural gas production. So, they were looking to move a lot of stuff. And bumping up to 14 would have been a huge, huge move--

Muckerman: In just 10 years.

Crowe: Yeah. That's a big change to the natural gas market that may not necessarily the market would be ready for.

O'Reilly: And last but not least, Pep Boys (NYSE: PBY). Anybody want to buy an auto parts chain or anything?

Muckerman: Long term? Sure, it might do well with all these trucks that are going to come on. They're going to break down on the side of the road someday. But when you have cars like Tesla, probably the way of the future, with no fluids, no engines, what is Pep Boys going to fix and sell? I don't get it. I mean, Teslas aren't breaking down. If they're breaking down, they're burning to the ground.

O'Reilly: Which has happened.

Muckerman: You can't go to Pep Boys to fix that. You're going to go to Tesla and be like, "Give me another damn car." I don't know, that's obviously a very long term thought.

O'Reilly: He talked about the huge opportunity to expand, how he's going to open a couple hundred more Pep Boys everywhere.

Muckerman: I have no idea.

Crowe: Just looking broadly at what I'll call the three big Christmas presents of Carl Ichan, between Pep Boys getting--

Muckerman: "I want my scalps!"

Crowe: --Cheniere Energy's CEO and Freeport's CEO. Going into Freeport and Cheniere, it's like, "Oh, we can cut costs, do all these things to get value out of these stocks." And the same thing, he's like, "Oh, there's immense value in Pep Boys." But looking at these commodity companies, it's hard to see how much more cost cutting can go on than what's going on, unless you're looking at rapid divestitures to basically slice the company down.

Muckerman: Which could happen at Freeport.

Crowe: It could.

Muckerman: With Cheniere, I think it was just, pull back on the throttle. With Freeport, you could definitely see some--

Crowe: And sometimes it's hard to see, necessarily, what exactly the thought process is when it comes to some of these things. I don't want to say that he's wrong in any way, because I don't know. He's made a lot of money, way more than I ever will.

O'Reilly: "Listen, he's really rich."

Crowe: He's really rich. But, at the same time, I look at these moves, and Pep Boy's the same thing.

O'Reilly: It struggles to make money right now.

Crowe: It struggles to make money and, even when you do comps to other service companies, it's not a high margin business in any way whatsoever. The returns on capital aren't even that great compared to somebody like, maybe, Advanced Auto Parts, or an AutoZone, where you're just selling parts. The returns on that are much much higher. So, I just don't see it, personally.

O'Reilly: "Pep Boys is going to be huuuuge."

Muckerman: Welcome to the show, Trump! Maybe there's something. I mean, there was a bidding war for it. They rebuffed him once, then another company came in and made an offer, and then he matched it. And now it's his.

O'Reilly: He's going to leverage it up, that's how I see it happening. Because he's a corporate raider. Anyways, cool. Alright, that's it for us, folks. If you're a loyal listener and have questions or comments, we would love to hear from you. Just email us at [email protected]. As always, people on this program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against those stocks, so don't buy or sell anything based solely on what you hear on this program. For Tyler Crowe and Taylor Muckerman, I am Sean O'Reilly, thanks for listening and Fool on!