It happened again. Wall Street got all bulled up on oil, so excited about the fact that OPEC+ had managed to get oil to $70 a barrel without any real demand, just a curbing of supply.
One after another the analysts found things to love about a heavily debt laden Occidental (OXY) or a slimmed down BP (BP) or a well-run Chevron (CVX) with a good yield.
And in the end they both caught the top and formed the top.
When oil got to its higher levels in July we put on Carley Garner's chart work showing that we were at the peak for oil. How did she know? First, she looked at large speculator positions available through looking at the Commitment of Traders report, which showed that this cohort was long 500,000 contracts, precisely the level where the market has peaked out before -- just a case of everyone in the pool already.
She examined a phenomenon called backwardation where the futures contracts the furthest out are lower than the current futures. Then she looked at the calendar and noted that oil has tended to peak in July and go downhill, something tone deaf equity analysts didn't seem to realize.
Why was this so predictable? All of these technical issues can drive the performance of the stock but it is a commodity and we must always revert to supply and demand when we try to figure out price.
As long as oil was in the $50s and low $60s our producers showed great discipline. But as our oil expert Rusty Braziel from RBN Energy, points out, there is too much money to be made for American producers at the $70 level for them not to break discipline and that's exactly what they did, The rig count jumped up 10 to 500 last Friday on the crude rally in part because, unlike the Wall Street analysts, the people who run these companies know that the price was artificially inflated by OPEC+.
Yes, oil should never have been at $70.
Now with the Delta variant raging and a slowdown conceivably on the horizon I don't know if oil can stop at $60. Most of our companies are still very profitable above $60 so there is certain to be even more cheating.
What do you do if you want to own an oil? You need one first with plenty of yield support. With low rates that might keep you from losing too much money even if oil cracks $60. Devon (DVN) and Pioneer (PXD) have variable dividends, and with oil at this level will be among the highest yielding stocks in the S&P 500. Chevron, which everyone seemed to love just a few weeks ago, isn't talked about much now as it has come down from $113 to $93 where it yields 5.7%. I like that very much.
Now we know there are existential threats to this group because they are, alas, carbon-based. But most are doing their best to reduce their footprint and they been having decent results. Keep an eye on Exxon Mobil (XOM) with a newly elected board with members dedicated to making Exxon carbon low as soon as possible.
But the fact is, you really can't do it if you are an oil company. There's too much oil ethos and cash flow tied up with oil. That's why I favor green hydrogen which has no footprint whatsoever and just needs low-cost energy to make. That's why I put on Cummins (CMI) yesterday. They are developing the ultimate engines that run on green hydrogen.
Right now, though, you don't have to worry about the doomsday scenario, you just need to remember that people got too excited with oil in the $60s as they are wont to do and it just flew high both versus supply and demand.
Oh, and be careful, it might not be over even as it is a terrible proxy for world growth and a much better one for world greed.