Very large macro financial pressures are working on the oil market, but I will reiterate my call that a generational opportunity is emerging here, where oil will not go significantly lower and the oil stocks that are dependent upon its price are reaching levels you won't ever see again. I particularly want to point out EOG Resources (EOG) at $77 and Hess (HES) at $57. (EOG Resources is part of TheStreet's Action Alerts PLUS portfolio.)
Horrible Chinese data have brought a stock market collapse in the last several days and oil is never outside the "risk off" trade. As oil prices dropped insignificantly past the lows set in the spring, oil stocks took another tumble, placing them back into the ranges we wanted to see to unload some capital on them.
One indicator taken as extremely bearish this week was the Wednesday crude oil build in Cushing, Okla., of 2 million barrels, in contrast to an expected 800,000-barrel draw. For many oil observers, this is just any kind of build and meant to be sold. But this one is very different indeed. Most of this new supply is coming from Canada, where the basis differentials are forcing bargain-basement crude oil into the U.S. Encana (ECA) is the worst case in point and has become the poster child for bad management in the Canadian oil sector, forced now to pump and sell at any price and fully worthy of the single-digit stock price.
As bad as it is for many U.S. E&Ps, they are not in nearly the same leaky boat as the Canadians. With the crude contango running between 75 cents and a dollar a month, all incentive to sell new crude barrels on the prompt market has disappeared. Pipeline storage and even conventional storage at refineries has grown in the U.S. in the last five years enough to put another 200 million barrels of crude away, and with these market conditions, that's precisely what U.S. E&Ps are going to do. With the contango this deep, U.S. producers are finally being paid, and paid very well indeed, not to pump.
On the other side are refiners, who are seeing $15 to $17 premium gasoline cracks, a premium I haven't seen since 2006 -- and those kinds of margins for gas production will push the refiners to buy as much crude as they can get their hands on and hedge out cracks for as far as they can find a supply seller. The down time at the BP (BP) Whiting refinery is a measurement of just how "pedal to the metal" hard the refiners are running their plants.
Now, is this condition market-bearish? Well, stockpiles will continue to go up, to be sure -- storage is now the only right thing to do with supply. But in the prompt and forwards markets -- those that are not financially based -- you have two fundamental bullish factors at work from two strong commercial players: E&Ps that would rather store than sell, and refiners that want to buy as much as their refineries can handle.
Trust me on this: In my decades of experience trading the financial markets, they can be skewed for a time by financial forces that are outside the commercial realities, but ultimately the commercial players will show the way. In short, there are no more commercial sellers of prompt crude, even as the hedge funds and the arbitrage players against stocks and currencies continue to load up on the short side.
There's a wonderful war between the fundamental players in the markets -- the real producers and users of oil -- and the financial players that dominate the futures markets shaping up here. And yes, they could force prices down a bit more. Money in the oil markets has always been able, at least for a while, to swamp out the true legitimate users of the market.
But I don't want to be on the short side of this war when the selling runs out. That porthole to cover shorts is going to look awfully small, with a lot of people trying to get out at once.
Moreover, I want to be in the best of the best shale producers when the dust does start to clear -- and that means players like EOG and Hess -- back down now for a short time, I think, to real value levels.
This is the time to take advantage of those prices, and find some oil stocks to buy for the long haul.