The turnaround in oil stocks the past few days is fascinating, and now we are looking at a seismic rebalancing into energy that is not just being created by machines or tactical hedge funds. As oil has drifted lower, we've found a lot of strength in energy stocks, even though the broader stock indices have been exceedingly weak. Take note, traders: Your time has come.
We've been exceedingly patient on oil and oil stocks, and both have followed the timelines that I have laid out in my columns and in my latest book. Two things, however, have acted on me to make a minor timeline adjustment. One is the acceleration of oil stocks to the downside in the early summer, even as oil remained near $60, and the other is the lack of rapid mergers and acquisitions among shale players. Consolidation may yet come, but this can no longer be the only trigger for investment as stocks have acted weak while oil was strong. Now the stocks are beginning to rally as oil fights to remain near springtime lows.
Oil won't make significant new lows, folks. I've said that all along and still believe it. Thinking only about Canadian oil, where basis prices are already in the $20s, there's a level of ridiculousness that won't be breached. And we're finally seeing reality checks inside the quarterly reports of the mini-majors and shale producers, as well as fundamental signs of supply destruction yet to come.
The Energy Information Administration still uses its worthless rearview mirror to put U.S. production for 2015 at 650,000 barrels a day above last year's mark. But even the EIA predicts a drop of almost half a million barrels a day in 2016. Finally, we've seen production guidance from mini-majors Hess (HES) and EOG Resources (EOG) drop -- and these are the smartest players in the patch. They are no longer willing to play the arms race of core production "high-grading" along with efficiency gains to out-produce the next guy.
Yes, break-evens are dropping in the Bakken and Eagle Ford shales. But what others forget is that those gains will be achieved by only the few and the very best. The smartest comments from the recent quarterly reports came from the smartest player in the space: EOG CEO Bill Thomas, who not only guided for fewer completions and less production, but also predicted that production would slow a lot quicker than the EIA believes.
Add an IEA projection of 97 million barrels a day of demand in 2017 and you have a reason to start believing that oil and oil stocks will be the smartest place to be in 2016. And I believe the start of that rebalancing act into energy started this week.
With the Dow Jones Industrial Average off by more than 400 points this week, stocks like EOG and Hess began to rally, even as oil touched $43 a barrel.
If oil stocks presaged the drop in oil in the early summer, it's a trader's instinct to believe that an unusual rally in oil stocks might signal a coming reversal in the commodity. And I've witnessed enough CEOs these past weeks, including the head of OPEC, finally become convinced that oil prices will be depressed for a very long time. Sorry, but those guys are not traders and are almost never right.
I've meticulously advised readers to stay away from oil and oil stocks throughout the summer -- and we've been rewarded with nothing but lower prices and fewer headaches. But the time has come.
Start building positions in shale oil stocks. My favorites remain EOG Resources, Cimarex (XEC) and Hess. If you see EOG near $75 again or Hess near $57, jump.
And if you have real courage, go long back-month crude oil, too. I am going to restart my rolling long oil position I was so ignominiously stopped out of on Thanksgiving 2014, but it was still massively profitable through the four years I had it on, despite the 2014 loss. Oil's about to start a very long climb.
Your patience is about to be rewarded.