How Cool Heads Can Prevail In This Panic

The oil market’s in freefall, the stock market is in freefall.  You’re taking losses, big losses, in stocks that you bought – not at the top of the market where valuations were high – but at areas you thought were terrific long-term propositions.  What do you do now?

I am precisely where you are right now, because I am an oil trader, first and foremost.  And I can’t tell you what is going to be right for you, I can only tell you what is right for me.  And for right now, I’m standing pat and even committing a little more capital into these markets here.  And I’m going to tell you why.

Panic.  It is clearly what has inspired the last several big drops in both the oil market and with stocks.  I saw Professor Schiller of Yale University on CNBC comparing this selloff with 2008 and 2000.  Really?  Are P/E ratios in the 40’s?  Is there a structural credit market problem about to explode?  If there is, I’ve missed it.  Nothing fundamental has changed, instead, there are only rumors and speculation about what is the new reality on oil.    Let’s look at some of them.

One is the perception that OPEC is coming apart and the Saudis are engaged in a war for market share with the rest of the Cartel and the shale producers here in the US.  A letter from Saudi prince Al Waleed has warned of the dangers of $80 oil and squelched the idea that this is a new Saudi policy.  What I believe has happened is that the Saudis have worked to retain market share first before even considering unilateral or Cartel-wide ceiling cuts. They’ve learned that jumping the gun on production adjustments doesn’t help them or the markets.  See the useless increases in 2005 and 2010 as proof of that.  The OPEC meeting in late November will certainly be interesting.  

But $80 oil is not sustainable. Harold Hamm, CEO of Continental Resources (CLR), was interviewed on Bloomberg TV saying that $75 oil would require ‘adjustments’.  You bet it would.  Even with the strong capital position of Continental, capex for 2015 would need to be slashed – and there are multiple players in the Bakken with far less strong positions than Harold Hamm.  Weak players ultimately drop production, ending the glut that seems to be so worrying the market today (although there’s been a structural glut in oil for the last year).  

Volatility is built on emotion and that’s what’s driving the action today.  Can oil go down to $75, to $70? Sure, but it can’t stay there. This market is, I believe, more concerned with the US outbreak of Ebola in Texas than the oil glut.  It’s just a moment when everyone’s nervous and raising capital.  Look at the bond rally, if you don’t believe that.  

But I bought Cimarex at $115, not at $145, Anadarko at $89, not $115.  And oil at $89, not $105.  So, I’m not ready to throw in the towel on this trade yet.  

Now, there isn’t an analyst anywhere who doesn’t think prices will go down another $10 first. Where these guys were at $105, I don’t know, but they’re all convinced of it now.  They could all be right, but every bone in my body tells me that this is a panic move that needs to be bought.

And if I’m wrong, I’m wrong.  

I can’t tell you what to do, but that’s what I’m going to do.  Good luck.