Wow -- nothing stayed still in oil while I took a short week off, as we finally saw the break downward that I was expecting for so many weeks. But is this now the right time to get back into an oil sector that I have been saying needed this break? The answer is: We're getting closer, but not yet.
After weeks of oil hovering around $60 a barrel, we saw a break down close to 10% at the beginning of last week, a secondary drop in prices that I have been expecting. Oil stocks have not really been waiting around for this drop in prices to begin melting during the summer -- particularly around the shale players here in the U.S. Even some of the best survivor candidates that many point out as solid long-term investments have gotten schmeissed in the recent stock market drop, and the relief rally today from the tentative agreement with Greece has not seen any interest return to the oil patch.
And I don't think it will -- at least not yet. If you haven't yet picked up a copy of my book outlining the future of shale oil as I see it, you should -- as the shale bust is nearing its first anniversary and the trajectory of the next year is answered there. But a few added factors may stretch the run on the oil clock that I outline in the book.
One is China, with its very unsteady stock market and continuing real growth questions. Another is Iran, where the current administration seems set upon making a deal -- any deal. With a report this morning of another tentative arrangement with Iran after another deadline postponement, it is exceedingly clear that something will be signed. Whether or not it meets with congressional approval will likely not matter to oil; the Iranians will ink a deal with the U.S. and instantaneously turn east and ink a subsequent deal with India and likely China for very cheap barrel exports once the sanctions are relaxed -- and they have been greatly relieved already. This will add at least another 1 million barrels a day of oil to the global glut -- again making the secondary crude bust inevitable and longer.
Part of what I argue in my book is the consolidation "tell" that needs to occur in oil for this glut to even begin to clear. I'm waiting for a lot more to happen than "merely" the big Shell (RDS.A)/BG Group merger at $70 billion. I'm waiting for whole companies to be swallowed up in the shale space -- something that so far has not happened.
But we're getting closer. Continental Resources (CLR) starts to look like a tasty buy as shares drift into the mid-$30s, as does Hess (HES) if it drops under $60. Get EOG Resources (EOG) to $75 and the 20% premium it would require to buy shares still gets them under $100 -- that's something that would interest the cash rich Exxon Mobil (XOM) or Chevron (CVX). (EOG is part of TheStreet's Action Alerts PLUS portfolio.)
And don't think it won't get there.
We're getting toward the moment that the big and patient oil companies have been waiting for -- when many of these companies finally run out of capex and recapitalization tricks and need a partner.
But we're not there yet. Keep your powder dry for the rest of the summer and watch Iran and China for further clues, as I am.
