There's so little good news to share in the energy sector that it's getting tough to stay positive on the space. But as I mentioned in my last column, oil fundamentals will ultimately win out and unless we're headed for a full-on European Union recession or a true China collapse, there are definitely good times ahead.
But for now, there's nothing good to say. The latest ruling on BP has thrown a blanket on offshore drilling in the Gulf of Mexico. That was a growth area for oil production I really thought might be making a comeback by now. If you have any doubts about how bad the action is in offshore drilling, have a look at the latest miserable shallow water contract inked by Noble Corp (NE), a measly $317,000 a day compared to its previous rate of almost $500,000.
This shows why even my latest recommendation of Transocean (RIG) was premature, even after avoiding the sector for more than a year. Transocean continues with a 52% commitment for its fleet past June of 2015, a number that will make that 8% dividend unsustainable if things don't pick up soon.
Rising rates of the 10-year bond are coupling with the rising dollar and driving oil prices lower. I'm not a big believer in the Fed reaching the end of easing so quickly nor the certain impact of the strengthening dollar on oil prices. But to be sure there are some strong trade connections between oil and monetary policy that cannot be ignored. If the market is perceiving the end of easy monetary policy along with a relative devaluing of the Euro, that's going to put some major pressure of prices, maybe even dropping oil under $90.
But that's just got to be temporary -- an oil mirage, I'd call it.
One way to invest now is in back month crude oil futures. That is a strategy I've given to you often that has made tremendous money for me for the last two years. It is taking a 'rally rest' right now, even as it maintains its value far better than spot month prices have. Take a look at a chart of December 2015 futures:
I will find it easier to buy futures here with this chart entering such strong support levels even more than buying the U.S. exploration and production stocks that will benefit from a rising oil price. Both can work splendidly, but with U.S. growth stocks and their very high beta, I believe there is more downside that could present itself first.
For those many of you who have no comfort with the futures game as I do, some target numbers I would look for are Pioneer Natural Resources (PXD) at $180, Cimarex (XEC) at $115, Noble Energy (NBL) at $63 and EOG Resources (EOG) at $92. These are tough targets, but for now with the oil markets looking so weak, we have to be disciplined in our approach.
I can bless buying the outright long-dated futures right now, but I really want your money to stay in your pockets on the stocks.
This oil market just wants to go lower.