Finding oil's sweet spot
As the overheated crude market begins to resemble reality, is there a level at which consumer stocks and oil companies both win?
Going into this week, the national average gasoline price hit $3.99. Right now it looks like it will NOT take out that $4 mark that was so devastating to demand last time, especially after this morning's collapse in crude.
At last we are seeing a semblance of reality in this overheated market -- one that, anytime you say might be inaccurate or overstated, is defended by the "free marketeers" who actually try to explain that the market is an honest one that correctly prices crude.
Markets don't collapse like this if they are honest barometers of the price of the commodity. The price of oil should have been in free fall for a while but for the combination of momentum oil ETF buyers, fears about Libya that are dissipating post-Osama Bin Laden, and the small amount of capital required up front to control a lot of oil.
The question this market is trying to solve is: "Might there be a level at which the consumer wins and the oil companies don't lose?" In other words, we are in a market of absolutes. It goes like this: "If Hess (HES) goes up, Darden (DRI) must come down." You can't have both go up at the same time.
I am struggling to find a scenario in which the reality seeps in, though. For example, last year if you told me that oil was going to $100, I would pay $100 for Hess, similar to how it traded going into 2008.
But would I sell Darden in the $40s? No, I don't think so. Oil is just not that important to the company.
That's why I'm struggling right now. The oil stocks almost have to get hit again and again if we go to $100 on the futures. But they can make fortunes at $100. So why would you continue to sell them?
Meanwhile, how can you not buy Darden if you know the most important variable might have peaked?
Where am I going here? I am saying that as bad as the oil futures look, the oil stocks did not forecast $120 or $130 or $140. Therefore, they shouldn't lose, I believe, more than the same percent that the futures are going to lose.
Bottom line: Oil companies are going to make fortunes if oil stays at or near $100. I have said that they will keep going down, but you had to start buying them into weakness. We are underweighted in oil for Action Alerts PLUS. Time to do some nibbling.
And the Dardens? Maybe we wait for another variable -- employment -- before we make a decision.
At the time of publication, Cramer was long Hess.
Follow Cramer's trades for his Charitable Trust.
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