6/3/2013 1:19 PM ET|
Is oil joining the other commodities' collapse?
These are all signs that we are on the verge of a slowdown of epic proportions.
The inability of the Baltic Freight Dry Index to give us even a couple day's worth of rallying during this last month is mind-boggling. The index, a true measure of commodity uses, is a slow-motion train wreck. The rates for oil tankers can't rally even for a couple of weeks, no matter what the geopolitical tension.
In the midst of all of this chaos, one number stands out for its absurdity: the price of Brent crude, which is still hovering at $100 per barrel, as if there's no slowdown anywhere, nor any increase in production. The number mocks all of the trajectories of the other commodities, because it can't seem to dip even when China slows, when Europe slows, when Brazil slows, when Russia slows or when the U.S. finds more oil. It is pretty evident, moreover, that the U.S. oil production is coming back far more quickly than any of the talking heads say it is, and imports are at a 20-year low -- 36% of current consumption -- and going lower.
Our domestic oil price -- the actual price, not the posted price -- is coming in at about $80. Somehow, though, it hasn't mattered one whit to the global price. The world is awash with oil that would have otherwise been sent here, and it doesn't seem to matter at all to the global price. Meanwhile Iraq adds to production by the day, Libya's back on line and Iran is still able to pump out plenty of oil despite the soft embargo. Yes, the Saudis could retreat from the market a tad if they wanted to support prices, but they haven't had to do so in any meaningful way because the price simply hasn't come down.
Second, even as China is slowing, the car sales remain robust. They are out there securing supplies worldwide, moreover, as we know from the perceptively painful piece in today's New York Times, China takes half of Iraq's production.
Third, while the U.S. is economy is coming back, the economy still isn't coming back so quickly that it can support a higher oil price here than it can in the rest of the world. There has been endless chatter that, once this bottleneck has been solved or that bottleneck is eliminated, West Texas will trade with Brent. Despite that, though, it just isn't happening.
That brings me to the fulcrum of this debate. Oil started breaking down Friday, and West Texas came down to $91. Brent could be on the brink of decisively breaking $100. I think these declines could be the real deal, given the state of the world's economies. It is, of course, great news for the American consumer, and fabulous news for deflation, which would again make the idea of dramatically higher rates inconceivable -- although I still think they are moving up.
But it does make the oil stocks a sale. I think this group could join the rest of the commodity producers in going lower at this point, so it is time to underweight energy and do some selling in the oil-services stocks before it becomes obvious that the top might be in. I think that's a much more likely scenario than a rally by the rest of the commodity complex, given the free fall nature we saw just last week in every other commodity in existence.
Jim Crameris a co-founder of TheStreetand contributes daily market commentary to the financial news network's sites. Follow his trades for Action Alerts PLUS, which Cramer co-manages as a charitable trust.
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Serious issues like drought and the deterioration of the developed world spell opportunity for this industry leader.
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