Is Oil Going to Crash?

 | Apr 10, 2012 | 2:01 PM EDT  | Comments
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,

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Is oil going to crash? The stocks are saying oil is about to burst a gasket and come down hard, crashing through the $100-per-barrel West Texas Intermediate prices.

Here's the problem: Brent. The real benchmark crude remains at $120 per barrel, which is just incredibly high. In fact, it is barely down.

Companies I follow that drill and produce crude are still making fortunes. If Brent doesn't break below $100, which is where these stocks are indicating, you are going to have a buying opportunity for a host of oil names and master limited partnerships just on yield alone. They are simply going to make too much money -- unless Brent falls below $100, and it is really far from that level.

Why is oil going down so fast? I think the Saudis are pumping so quickly that they actually are able to keep prices lower. You can only store it in so many places. Plus, we aren't using the amount oil that we were a couple of years ago, but we are producing more. Also, while China and India do matter, our use and production are more important.

But we keep in perspective that the stocks are going down so much more than Brent. Either they know something -- which, in that case all fuel users are worth more than they were -- or they are just plain buys right now.

Otherwise something is wrong with this picture. My inclination is that if I can buy oils at good prices relative to even $100 Brent crude, then I would go from under weight, where the Action Alerts PLUS portfolio is right now, to equal weight.

However, the oil stock complex is a falling knife now -- one that is so ferocious that it isn't worth planting the flag on. We have seen these oil selloffs take on a life of their own such as when Schlumberger (SLB) and the Chevron (CVX) cascaded. We are still seeing rational point losses. Not what we've seen in times past.

Just keep in mind, though, Brent, $120 per barrel, is not cheap. It's still wildly high.

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