Get ready to pick up some drillers
Remember, even when oil plunged by $100, very few long-term service contracts were canceled.
That's how it would be if oil were down $5 over five days. It would be wrong to take such strong-headed action. But it would be especially wrong after the bogus trading we saw in the last half-hour of the oil pits Monday.
We know stocks are trading thinly, and despite endless protestations that somehow high-frequency trading enhances liquidity-something -- which even the worst perpetrators would admit it doesn't -- we know manipulation simply can't be helped. High-frequency trading exacerbates all natural directions because there is no counterweight and because there are fewer and fewer players in stocks.
I just didn't think there were so few players in oil.
Anyway, here's what matters. If you look at the sudden decline in oil from 2008 to 2009 -- the one that took the price down $100 pretty quickly -- you saw a decidedly low number of long-term oil-services contracts cancelled. Almost no rigs were cancelled at all.
That's because these projects require a long-term view on oil, and the long-term view for almost all companies -- whether national or private -- is that they can't maintain their production growth with just the current number of rigs. Yet production growth is a must for strapped budgeted countries, and it is a must for private companies, because almost all of them trade on production growth that replaces spent fields.
So they keep ordering and ordering, without much worry about the futures.
We know that pattern from just four years ago, yet the stocks trade on every whim of the futures, regardless of how obviously manipulated or thinly traded they are, as we saw from the close of trading.
The names that are most buffeted tend to be the least likely to see cancellations -- stocks like National Oilwell Varco (NOV) or Schlumberger (SCHL), which catch fast money out of the stocks as well as fast money into puts on the Market Vectors Oil Services ETF (OIH). The moves are instantaneous, and they are devastating.
I am not telling you to take the other side of the trade just yet. The oil rally off the bottom at $80 to $82 has left the stocks on an unsustainable high that is now going to be repealed.
I am simply reminding you that, in the worst decline I have ever seen -- the trashing from $147 to $50, and even a few dollars below in the height of the lunacy -- we saw very few cancellations.
Some of that is due to new discoveries off the coast of Africa. Some is due to a resumption of drilling in the Gulf of Mexico. Some of it is the exploitation of massive finds in Brazil -- finds so large that they need a gigantic number of new rigs from National Oilwell.
Perhaps most important, a lot of it comes from the need to find oil in the U.S., where technology has opened whole new fields. Take one look at how Chesapeake needs to exploit its new fields in order to more than make up for the Permian acreage sold. This tells you a futures plunge is downright meaningless. It took forever for natural gas drilling to slow, and the price decline for oil has been nothing like that. So watch the hammering for a day or two, and then get ready to buy the best of the best OIH names -- namely, Schlumberger and National Oilwell Varco.
Jim Cramer is a co-founder of TheStreet and 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 and is long SCHL.
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Americans need of wise up - pull out all the impediments to alternative sources of energy while keeping fossil fuels without over regulation. Continue to use fossil fuels while developing wind, water, solar and wind power. As it is - all those so called "activists" are just causing many of the problems that impede the economy - without any concern for the future of America.
Also - keep in mind - it is in the best interest of the US that foreign oil makes up the bulk of what is used in the US. In fact - the US government needs to block all oil, gas, etc exports - that is - all that is produced in the US itself. Keep US oil stored - use oil from the rest of the world.
cramer is always right..........he says sell and when it goes up he says, see i told you to buy....
truly an unfunny clown ...............and if you watch the faces he makes when he is "emoting"
you can see he is not quite all there
Vaclav Smil has successfully demonstrated, "Energy Myths and Realities", 2010, that major
sources of commercial energy (wood, coal, gas, oil) are not displaced quickly. The related,
necessary supportive investments are too expensive and prevent rapid change. Enough said.
I don't know. We're past peak oil. So each new well costs more to get a barrel out of.
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The idea of US crude being a shelter from turmoil abroad may not be as far fetched as it seems.
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