Things Are Starting To Get Fun Again

I was feeling so lonely these past weeks. All alone trying to assess the oil markets, with their wild volatility. Then, suddenly, seemingly every investment bank oil analyst saw the need to weigh in on the price trajectory of crude. Things are starting to get fun again.

It's fun because I enjoy the foil of analysis from the 'big boys' to steady my own opinions on the market - after all, these are the guys getting the 'big bucks', not me. But when I get through reading all their opinions, I usually find that I like my perspective of 25 years of trading, as opposed to their academic thoughts on a market always capable of surprise.

The surprise for me contained in all the reports from Citibank, JP Morgan and Goldman Sachs is how unified they all are on the next medium-term move in the oil markets - down.   In this, I am in agreement (which scares me), but it is the targets they give that I find difficulty seeing, with some bordering on ridiculous.

You'd get suspicious, if you weren't a 25-year trader and haven't seen it countless times before (or maybe because you are). These predictions are almost begging retail customers to short oil and oil stocks immediately and THAT definitely scares me. Jeff Currie, the commodity head at Goldman Sachs in London, normally sends out quiet notes that shake the markets, yet yesterday was seen on CNBC giving a 10 minute interview on how the retail customer is violently overvaluing oil and oil stocks here. JP Morgan left a quiet time bomb with a $38 crude target on the downside and a very, very long recovery outlook. But no one outdid Ed Morse at Citibank, whose "W" recovery thesis and $20 downside target borders on the insane.

Let's parse where we're going to go with these real experts and where we're going to veer off into a different path.

First, count me as one oil guy who did not panic as Brent crude approached $60. Before any of the analysts declared after the fact that this move was a short-covering, rig-count inspired head fake, I was writing and on air saying that a sustained rally was not in the cards. But that rally did, I believe, put very real boundaries around what kind of oil price action we were likely to see, as this shale bust continues to go through its phases. Downside targets are more difficult to predict, and I have not tried - but even a significant new low beneath $44 now would mildly surprise me. As for a 2-handle, or even a low 3-handle, you are talking about a collapse of 3 or 4 international economies that would inspire civil wars and horrible global consequences. These things won't just not happen - I don't believe they would be allowed to happen.

So, how do we invest inside these boundaries? The easy rebound money has been made, and I don't believe new 52-week stock lows are likely for the good oil E+P's. However, the recapitalization and reorganization of those companies is just beginning, meaning that there will be increasing acceleration of stock secondaries, preferred share offerings, more hi-yield debt and private equity capital flows. ALL of these will put even more pressure on E+P shares, even if oil does nothing except hang around $50 a barrel for the next several months.

Inside of some of these inevitable offerings are going to be opportunities, as well as equity offerings to be avoided. I'll analyze those as they come, but here's a taste of the possible: Whiting Petroleum (WLL) will likely need a recapitalization and a secondary, should it come, would be an interesting opportunity. Same goes for Continental Resources (CLR), now in more need of one since taking back their short hedges. One to be avoided is a likely preferred share offering of Halcon Resources (HK), should that materialize.