The last two trading weeks of the year have always been a time to avoid for me -- a moment of tax loss selling and unfathomable blips in stocks, both up and down, that generate false signals. But it is a good time to watch the market action, and plan ahead for the New Year. Here are some things to keep on your energy radar moving into the early weeks of 2016:
Oil is now trading under $35 and the most important thing to keep in mind is the relentless one-sided view on oil prices -- that they're going lower, and incapable of a rally.
One-sided views on any market are always a great reason to at least prepare oneself for the absolute opposite reaction, if not bet against them.
There are several reasons to expect an early 2016 snapback rally in oil prices, and a fairly violent one: First, and I've mentioned this before, there are few if any commercial participants who are willing to sell oil anywhere below $50, and certainly no one below $40. Leftover hedges, the last of which come off in March 2016, will look to be replaced, but only do any good whatsoever at least $10 higher from here, definitely minimizing the price oil can rally to, but also maximizing the speed in which those 10 bucks can be added.
Speculative short positions decreased marginally in the last week, at least signaling that the smartest hedge funds realize they're pushing downward on a string and are wary of being caught in a short-covering rally.
To be specific, I don't want to be short oil or oil stocks here. Everyone could be right and oil is headed relentlessly to $25, but I've never made money betting that everyone's right at the same time. I won't start now.
But the coming rally in oil, when it hits, won't get me bullish on oil, either. I've also made it clear that I think the oil market has little chance of becoming really constructive at least until the third quarter of 2016. The coming early 2016 oil rally will be an opportunity to shave more off positions of oil companies I've been very sparingly accumulating during the last several weeks, including EOG Resources (EOG) and Cimarex (XEC).
And yes, in comparison to 2015, I'm going to look for opportunities to actually sell common shares of companies that I think are not likely to make it to 2017, at least not in the same form. Some of the short candidates I'm looking at include Northern Oil and Gas (NOG), Chesapeake (CHK) and, yes, Encana (ECA, which I'm currently long). This market has already decimated the common shares of oil companies with overleveraged balance sheets and marginal production assets; in 2016, I am expecting further destruction on a second tier of producers that have superb assets, yet labor under what I think will prove to be an inescapable pile of choking debt. Some of these companies were unthinkable candidates for restructuring or bankruptcy even two years ago, but seem inevitable now, if oil markets in the U.S. are ever going to clear -- and they necessarily must.
All of these 2016 ideas are based upon what I think is a coming short-covering rally in oil that does little more than chase oil stocks somewhat higher, but doesn't change the yearlong outlook for the sector.
Which remains unquestionably bad -- at least until the summer.
Best of the holidays to all my readers at Real Money. Here's to a more profitable 2016.