There's panic in the air. You can feel it. The market for oil has been dropping daily, with the price now trading under $85 -- under $90 for Brent North Sea grades. The headlines on CNBC are all about the turmoil, the volatility and uncertainty with investments.
It's an environment when traders tend to shine.
I'm not going to try to predict the bottom in oil. When there's this much panic surrounding a market, I know from experience that markets can wildly overdo what the fundamentals will tell you are the limits. Now is the time, however, to assess those fundamentals and make some positive moves for your portfolio -- moves that require some courage, to be sure.
Every oil watcher is now predicting lower prices, $75, $65, even $50. I've seen reports from Citibank, Goldman Sachs, Barron's -- even the very small and elite PIRA Energy Group of energy consultants -- looking for much lower prices.
But this is what I see: There's panic based upon the belief that the European Union is headed into a full-blown recession, that Chinese data points indicate that the bubble there is about to burst, and that interest rates in the U.S. are about to rise, immediately, and certainly not slowly. I don't believe any of those things.
Sure, stock prices were inflated and needed a correction. But the talk in the market is of more than a correction -- it is of a coming apocalypse.
In oil, however, this is what I know: At sustained oil prices of $85, there are a significant number of oil players that will rapidly go broke. At $80 crude, there aren't many new deep-water projects that will get contracted.
At $80 sustained crude, dozens of leveraged exploration companies in the Bakken and Eagle Ford shale plays that have been adding production on the margins can no longer operate. And don't tell me that they are all hedged on their future production -- they're not.
If the market was worried that overproduction in the U.S. shale plays was going to keep depressing prices, there's no need to worry. We will not increase our production much above the current nine million barrels per day, and ultimately, that number will rapidly decrease, as the weak players simply can no longer compete.
So, can oil prices breach $80? Sure, but they can't stay there. Meanwhile, as long as markets are in panic mode, there are some players that will suffer and some that will disappear. Now is not the time to put money into heavily leveraged exploration and production (E&P) companies nor into deep-water specialists. However, it also means that there are tremendous values right now in well-capitalized energy companies with responsible growth profiles -- on sale at prices I thought I might never see again. I believe they are worth starting positions in for the long haul.
I bought Cimarex Energy (XEC) and Anadarko Petroleum (APC), two well-positioned energy companies that have been hammered along with virtually every other energy company, with little respect for their particular portfolios and balance sheets.
In these panicked markets, I'll admit that's not an easy thing to do. But when there's this much blood in the streets, it's what traders thrive on.