There’s panic in the air. You can feel it. The market for oil has been dropping daily, 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 where 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 of market moves. 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 from here.
But this is what I see: There’s panic based upon a belief that the EU is headed into a full-blown recession, that Chinese data points indicate that the bubble there is about to burst, that interest rates are about to rise here in the US, immediately and certainly not slowly. I don’t believe any of those things are happening.
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 $85 oil prices, 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 get contracted.
At $80 sustained crude, dozens of leveraged exploration companies in the Bakken and Eagle Ford 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 US shale plays was going to keep depressing prices, there’s no need to worry: We’ll not increase our production much above the 9 million barrels a day where we are today, 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 players that will suffer and some that will disappear. Now is not the time to put money into heavily leveraged E+P’s, nor into deep-water specialists. However, it also means that there are tremendous values in well-capitalized energy companies with responsible growth profiles that are on sale right now, at prices I thought I might never see again and, I believe, 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 easy to do. But when there’s this much blood in the streets, it’s what traders thrive on.