Oil's Springtime Swoon Looks Overdone

 | Apr 22, 2013 | 1:31 PM EDT
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Hey, I go away for a tiny week in Europe, and what do you guys do? You go and ruin a whole good market in oil and oil stocks. It's not your fault, though -- this seems to be a regular event in oil and nothing to get overly excited about. Let's see if I can put together some of the pieces I missed.

Even from a perch 3,500 miles away, the panic accompanying this "spring swoon" in oil and energy shares appears to be a bit of an overreaction. Relax, people. This is hardly an unusual move for oil. In fact, we saw several small drops in the price of crude in both springs previous, in 2011 and 2012. And if you're looking ahead, another mini-swoon historically happens in the late summer.

But in both cases, the drop hasn't meant a new bear market in oil, and I don't believe it's going to mean one now. In fact, let's look at the positives we can take from this latest oil move, and from there maybe figure out some ways to invest in the face of it.

First, a relative strength of domestic crudes to foreign ones has emerged in this drop. Brent crude is down to a $12 premium to West Texas Intermediate, and the Canadian grades from the West are now done rallying -- and are still at more than a $20 discount to Gulf Coast crudes.

What this signals to me is a continuing weakness that is centered mostly in Europe, where the overhang from Cyprus and self-questioning on austerity programs and debt crises are showing up in Brent crude weakness, despite a steepening curve. Domestic crude has dropped from $96 to $88 -- big deal. But Brent crude has dropped from close to $120 to briefly move under $100 -- a far more significant sign of the underlying macro situation in Europe. Further, the European grades are directly connected to U.S. gas prices, so the relief from $4-a-gallon gasoline should continue for U.S. consumers -- a good sign.

Do you want a real bear market? Then look at copper, which is still the best indicator of Chinese growth or lack thereof. That's a commodity story that is again pointing to a disappointing Chinese growth profile for the second half of 2013.

In short, the oil market is telling us many of the things we thought we knew: The U.S. is by far the best house on a bad street, and while China's and Europe's future may not be as easily predicted, the recovery for the U.S. still looks relatively solid, despite the road bumps that oil seems to experience most every spring and summer.

And what of oil investments? While U.S. crude has dropped less than 4%, most exploration-and-production companies have fared far worse. Some have dropped more than 10%, the worst being in the higher-beta names that I tend to love investing in -- Noble Energy (NBL) and Apache (APA) and Anadarko (APC) to name just three.

That means to me a certain opportunity, but while I don't feel this "swoon" is permanent, I also don't believe any rush is necessary. A reacceleration of growth in the second half is something we can plan for, and we can choose carefully the horses we want to ride.

That will be the subject of my next several columns.

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