The chorus has become deafening: The International Energy Agency (IEA) has predicted a full "rebalancing" of the oil market by late 2017, with OPEC joining in on that timetable Thursday. Our own Energy Information Agency (EIA) has gone even more aggressive, expecting a cross of the global supply/demand lines later this year and agreeing with the timeline I laid out in my book more than a year ago.
The markets, as always an "anticipatory" instrument, are responding by ratcheting up prices of oil stocks, in some cases to levels corresponding to when oil was trading more than $15 a barrel higher it is currently. EOG Resources (EOG) is at $80 a share, Devon Energy (DVN) at $35, Hess (HES) above $60 -- all seen in late November/early December of 2015, when oil was hovering nearer to $60 a barrel.
As happy as I could be to see (some perhaps) premature profits on many of my long-term oil positions, I'm also wary. It is totally clear to me that oil stocks are getting out over their skis too far and too soon. I do not believe the oil stocks should or will react more positively to another $5 a barrel rally.
Some analysts see it similarly, even if they were late to this "energy renaissance" "sector rollover" "short covering" party -- or whatever name you would like to put on it. Deutsche Bank, for example, has recently downgraded EOG, citing simply that at this point in the cycle, there were better values to be had.
When the oil market was completely on the skids, making new lows under $30 and testing our resolve to continue to average into oil stocks, we did what our brains and insight told us to do: find the best quality shale players that were unimpeachable, even through a year or more of prices below $40. That's where we found EOG, Chevron (CVX) and Cimarex Energy (XEC).
We mostly ignored anything but the best, shunning those mostly solid E&Ps that had warts on their balance sheets or excess exposure to natural gas or a suspicion of a dividend cut or bond downgrade. It is precisely these names that have delivered even juicier returns in the sector rally: Devon, from a low of under $20 is now near $35, Apache (APA) has gone from near $35 to $55, Continental Resources (CLR) has moved from $20 to near $40 (!) and then there's our beloved Hess.
These are the stocks we must center on now.
Our long-term plays are in place -- or should be -- and should remain untouched. The next drift down in oil stocks in the next week or so should not be used to add again to those, but instead to add a little more on the ones that are clearly now far, far too ahead of themselves not to take another significant dip down.
So even if they are not the strongest players in the game, I'm going to key on those, many of which I've mentioned to keep an eye on and several we have already traded successfully: Pioneer Natural Resources (PXD), Continental, Devon and Hess.
A huge overhang of stockpiles still limits upside in oil. This year's million-barrel-a-day drop in U.S. onshore production will be offset by still-increasing production in the Gulf of Mexico. Iran remains the wildcard in OPEC supplies and Saudi Arabia is threatening another 1.5 million barrels a day of production (even if I believe they can't manage it). As such, I think there is little chance that oil, and oil stocks, won't take another move downward -- and a significant one.
Be ready for it and buy some "B-players." They're poised to deliver some outstanding mid-term profits.