Another week, another "Whoa!"
Baker Hughes (BHI) issues its North American rig count every Friday at 1 p.m. ET (the data are on a one-week lag) and it never fails to draw a reaction from me. This week's headline figure was startling, falling to 614. Baker Hughes provides a wide swath of data, but by far the most-watched data point is the count of U.S.-based, oil-seeking (as opposed to natural gas) rigs. That figure of 614 rigs not only represented a decline of 26 on a weekly basis, it represented a decline of 977 rigs vs. the same week last year.
The key takeaway is that U.S. oil production is going to continue declining, and that the rate of decline is going to accelerate from the summer's gradual slowdown. Thus, oil prices are forming a bottom. That's not to say the cadre of loafer-wearing, jaw-locking hedge fundies can't make yet another bear raid on the front-month oil contract. Of course they can, and they probably will.
Eventually, though, fundamentals will win out. Saudi Arabia and its OPEC colleagues won this battle. U.S. oil production is headed rapidly below the 9 million barrel/day threshold -- it may actually be there now, the EIA's official data is so delayed that it's hard to tell -- and it likely won't return for decades. It took the U.S. three decades to get back to 9 mm/boepd in this cycle, and I wouldn't be surprised if that phenomenon was repeated.
As Yogi Berra so wisely said, "It's Deja vu all over again." He also said, "That place is so crowded no one ever goes there anymore," and that's applicable here, too. The short oil trade has been done to death. If one more hedge fund buffoon tries to pitch me on the "oil is going to $30" scenario," I'm going to vomit all over his Bruno Maglis.
It worked; production is down and demand is up. I'm not sure if the boys from Cos Cob noticed, but the U.S. sold cars at a scorching 18.2-million-unit rate in September. I'm guessing most of those cars will need to be re-filled at some point, so there's the domestic demand bump.
Bottom line: oil prices have support at the $45/bbl level, and I believe we'll see $60/bbl before year's end. And while volatility will remain, I believe we'll see $59/bbl before we see $39/bbl.
The way to play oil prices bottoming -- from a short-term trading point of view -- is through small and micro-cap exploration-and-production companies (many of the former have become the latter in the past three months).
I recommended Magnum Hunter Resources (MHR) earlier this week, and the stock has risen from that day's low of $0.30 per share to a $0.42 Friday. Booyah!
That wasn't meant to self-congratulatory (not totally, anyway) but merely indicative of the opportunities in this left-for-dead sector. If you'll click on the link to that column, you'll see a very healthy discussion on MHR in the comments section. (I really enjoy reading readers' comments and love the feedback.)
But for all the kvetching about MHR and its current corporate policy of omerta -- it drives me bananas, too -- one thing should be noted: If hydrocarbon prices rise, MHR shares will, too. Magnum actually produces much more natural gas than oil, but this is not a sector in which traders focus on such significant details.
So, MHR shares are up 40% since Tuesday; I hope you bought some, and I certainly wouldn't blame you if you took profits. My clients and I are hanging around and waiting for MHR to rise through the $1 mark, but if you have already cashed in your chips, I congratulate you.
