Oil Stock Moves Are Absurd

 | Sep 20, 2011 | 12:20 PM EDT
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These oil stock and service moves are the most overblown, the most ridiculous advances and declines I can recall.

On every single dollar in the oil futures, these stocks act as if it is the end of the world or the beginning of a major ascent. They are the textbook example of how the ETFs move stocks as people fly in and take up (or blast out) the derivatives linked with the group. And that happens on even the slightest of crude movements.

It's illogical. It is stupid. And trading like this will not make you money.

First, let me start by saying i think Brent, the European price that everyone keys on, is too high. (West Texas just doesn't mean anything anymore.) The way Brent is being priced, which is basically by one research outfit, is just nuts. But that said, it has resisted coming in for ages despite the gigantic declines in other commodities, such as copper and aluminum.

Oil should be reacting to the slowdown, but I think it is being kept up by hoarders and EFT hounds that won't let it come in.

That high price, whether manipulated or not, is why I like the group so much. We keep hearing that there are going to be some really bad quarters ahead in the group, including numbers from next year.

I am not buying it one bit. The companies I talk to, and I talk to a lot of them, say the opposite. They say the trends are long term and that the need to drill, particularly in this country, is extraordinary.

If you just pay attention to the daily gyrations, you will miss the bigger picture of what is happening with Noble (NBL), Cabot Oil and Gas (COG), Range Resources (RRC) or Continental (CRL). These companies have huge drilling programs that are expanding and the service contracts will make the OIH be a terrific place to be.

I hate the fact that every data point moves the group. The fundamentals for oil are clear, though. We need more of the stuff. These companies have it. They are spending like crazy to get it out of the ground.

It is true that if Brent falls, the group will fall again. But I think that the valuations are so low that, at least for the independents, we are going to see still one more round of consolidation. On Monday there were rumors, for example, that Range Resources was about to get a bid. To me, that's totally legitimate. It sits on a mountain of natural gas in a world market that is pleading for the stuff, even if we don't have enough demand in this country.

Cabot Oil & Gas moved instantly, too, as it has colossal holdings in Pennsylvania that are ripe for the taking, even as I don't believe it can go higher on earnings.

The demand is there, long term. The companies in the industry are going to be drilling at heightened levels because they can make so much money at these prices.

The bear case holds no water.



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