The oil market has become nothing but a rumor mill -- rumors of Fed hikes to come, or even Fed cuts -- and, over the last few days, a stubborn rumor about a Russian/OPEC summit to cut oil production. Rumors are the worst, but this time the fix may be in; it's time to put some money into some oil stocks for the quick blast upward.
I own oil stocks, and it's been painful. I've been waiting since December for an inevitable short-covering rally of overloaded speculators to wash away most of my losses and give me a chance to get closer to even for this horrible year so far, and get another look at the timing of the crude bust and next boom to come.
I've been waiting to add money to favorite oil stocks to turbocharge that short-covering rally, and now it's time to take that last shot: Having seen a low of $26, oil could go lower but is bounded by zero -- and ludicrousness. Fed dovishness tends to lend at least some support to a few less rate hikes than they might have been leaning toward before stocks fell off a cliff.
Then there's Russia, now twice intimating a willingness to talk about a concerted production cut of 5% first floated through the Iraqi oil minister on Tuesday and today hinted at by Russian energy minister Alexander Novak. The Saudis and OPEC have both denied floating a plan or talking about a meeting.
Oil goes up on these rumors, but tellingly, doesn't go back down quite as much. The Russians are telling the truth. Saudi Arabia has proposed concerted production cuts to the Russians three times previously, most notably before both Vienna OPEC meetings in 2014 and 2015, with nothing more than a terse dismissal from the Russians. This time is different, at least so far as a Russian willingness to talk. And Saudi opposition to a calculated production cut is also a wrong media meme; they have been more than willing to talk about an effort to curb production -- provided they are not alone in it.
There is one previous incident of a Russian production deal with OPEC, in 2001, which the Russians almost immediately cheated on. Iran is also entirely unlikely to agree to any production cuts of their own, having suffered sanctions and now hoping to benefit from their first real access to global markets in almost a decade. OPEC is a cartel with a clear history of cheating on its own production quotas, even in the best of times, which this certainly is not.
Is there any chance that a deal will work? Almost none.
Does that matter? Probably not.
With the Russians behind the rumor mill, they'll keep the pressure on for a meeting -- even one that is doomed to fail, putting increasing pressure on speculative shorts and algorithmic momentum sellers who have been unrelentingly pushing prices lower. It will cause some of them to break ranks, if they haven't begun to do so already. That should result in an oil rally above $40, and maybe as high as $45 -- still a ridiculously low price, but enough to make for a solid rally in some oversold oil stocks.
Pick your favorites. I'm going with Hess (HES), Pioneer Natural Resources (PXD) and Devon (DVN). I'm looking for the ones that have been beaten down the most, or more than I think their balance sheets deserve. They're also the ones I believe will bounce back the strongest.
Do I think the Russians will make a deal? Nah. But it's worth a trade.