CERAWeek, the annual convention of oil and gas heads in Houston, is over, and what a meeting it turned out to be. In many ways it was a group psychiatric meeting, with many of the oil CEOs and even OPEC using the opportunity to talk about their deepest fears -- a new age of limited profits, overproduction and a replay of the oil bust that seemed only now to be subsiding.
And, indeed, as if on cue, we've seen the rapid selling of energy futures, which we all noticed were well-nigh overrun with long positions, in this case almost as deep a ratio as we've ever seen.
And as those energy futures have unraveled -- today under $50 a barrel -- we need to take a good, hard look at how we're going to manage our energy stocks going forward, and whether we're going to jump in the boat with the hand-wringing oil execs and abandon our long-term thesis on oil or use this dip as an opportunity to solidify our long-term positions.
If we take as a given truth that the drop in crude prices is less about the increase in stockpiles or the incremental rise of production here in the U.S. and more about the long/short ratio in the futures markets, we should gain an insight about what to do with this drop in prices. Crude analysts are working through the implication of increasing U.S. production, drifting again towards 9 million barrels a day, and even more are wondering whether OPEC again will extend production limits in May, which is more than two months away. But if we keep our heads, this drop in prices will appear to be more of an opportunity gained than a temporary loss to fear.
We've found a new sweet spot for U.S. crude, or at least shale production, that just barely tips the balance at over $50 a barrel. As crude drops below that level, producers again must turn off rigs or cancel the scheduling of new DUCs (drilled but uncompleted wells) that they had hoped to bring online, despite the dreams of all the CEOs at CERAWeek.
All of the work that has gone into efficiencies in laterals and spacing and even off-shore is felt today as only the most responsive acreage and leases are converting to new rigs. But, that remains a limited number of producers and a limited number of wells, in U.S. shale almost exclusively in the Permian. Meanwhile, even as the markets and the analysts are focused on these few producers and their rigs and the temporary swelling of U.S. stockpiles that is driving prices lower, the demand curve for global crude continues to catch up with the global supply glut.
OPEC compliance, which in January was an unheard-of 90%, crept up to an even more unbelievable 94% in February. Last week in Houston, not only did OPEC beg for help in limiting global production to U.S. frackers, but some big-shot oil guys did, too.
This untenable dream of cooperation between the U.S. and OPEC continues to focus on the Permian. And this is precisely where we've also focused all of our core energy plays in Cimarex Energy (XEC) , Anadarko Petroleum (APC) , Concho Resources (CXO) and Centennial Resources (CDEV) . (Cimarex is part of Jim Cramer's Action Alerts PLUS charitable trust.)
So, while oil markets temporarily can rotate under $50 a barrel at the same time as global markets continue to slowly but surely rebalance, and while OPEC might plead with U.S. producers during their own supply curb, we've surely got the inside track in long-term, profitable investments in oil when we continue to concentrate on Permian players.
My take is that oil markets disintegrate precisely when oil CEOs and OPEC don't expect it to. The fact that they are all fearful of a secondary collapse gives me faith that this is an opportunity in buying Permian players at the right prices.