From a fundamental view, it probably couldn't get worse for oil. Stockpiles have added 33 million barrels in the last 8 weekly reports, prices are hovering at $40 and momentum, alone, could cause a test of the previous lows near $38. Production hasn't slowed one ounce in the last year in the U.S., and third quarter reports from the exploration and production companies remain optimistic on growth for 2016.
So, why am I recommending Hess (HES) at $58 a share?
I'll tell you why. Markets are all I know -- and all I've needed to know -- for the past 30 years. I can read and understand all of the numbers and forecasts that the analysts are famous for, and I can use them and quote them -- but my insight comes from reading the "tea leaves" of market action, which is what I have based my living on for the past three decades.
And the market is telling me it doesn't get significantly worse for oil -- and now's the time to buy.
Have a look at oil prices. I've already told you how oil is bounded on the downside-- not by fundamentals, but by the financial players that are trading it. Futures markets, which set oil prices, can be simplified into two types of players: Commercial participants -- with real, physical positions in oil; and noncommercial players -- who bet on prices as a financial tool for investment or diversification. Few, if any, commercial player has any interest in selling oil below $40: Given breakeven prices, hedges down at that level serve only to lock in losses. And we've seen the short positions of the non-commercial players spike in recent weeks, now mirroring the number we saw when oil reached it's $38 lows back in April of this year, and again in August.
Each one of these spikes in short positions led to a mini "short squeeze" in prices: to $60 after the first, and to almost $50 in September. I expect similar action again.
Now let's look at some stock prices, particularly Chevron (CVX), EOG Resources (EOG) and Hess.
See how each of these "survivors" manages to remain strong, in spite of recent oil-price weakness? I had been recommending buying EOG and Hess as prices in oil dropped again, thinking that as oil approached its interim lows, these shares would as well.
But they haven't.
We could, in fact, measure how the market views all of the oil stocks and their ability to survive the crude bust by merely looking at their charts: those that are collapsing with oil's price, here, are the ones that the market says won't be around, at least in the same form they are today, for much longer.
And those that are showing strength into this dip back to $40 are the ones the market is telling me to invest in for the long haul -- including a few select U.S. independents.
Like Hess. I have sung the praises of EOG Resources many times before, so let's make a quick case for Hess as a great purchase at $58 a share. As a Bakken player, no one else -- save for Continental Resources (CLR) -- has as stronger a portfolio of core acreage. And the debt positions of the two aren't remotely comparable: Hess is immensely stronger.
Downstream assets at Hess continue to shield it from the singular problems that dedicated E&Ps, like Continental, are having. And, Hess took the bold step of divestiture and capital spending cuts more seriously than most -- selling off its proprietary trading group, Hetco, to a hedge fund late last year. When Exxon-Mobil (XOM), or another major, figures out that the time is ripe to augment growth through acquisition, Hess remains number one in my mind as a likely target.
As bad as oil looks today, there are some oil stocks that the market is telling me still look fabulous. One of them is, undoubtedly, Hess. I am recommending a buy at $58, as oil flashes below $40 a barrel.
