A closer look at oil's slide

The issue may be supply, not demand, and a painful buy could be your best play.

By Jim Cramer Jun 26, 2012 9:53AM

"I am not stupid. I don't own any oils. I don't own any oil futures. I don't own any natural gas stocks. I don't own any oil-service stocks. I saw this decline coming, and I sidestepped it. I am brilliant."

 

That's the litany that's going on as the quarter winds down. A whole complex, a whole segment of this market is being thrown out without any thought of value or any thought of a reversal, and it is breathtaking.

 

It deserves some analysis.

 

First, what's driving the oil and natural gas futures lower, although the latter has had a tad of a lift of late? The perception is that there is a dramatic slowing in demand. We believe that China's economy is ratcheting back so fast that they simply aren't using all of those gas guzzlers that they just bought.

 

Europe? Despite the fact that economic activity hasn't ceased and that parts of the Continent are robust, it's been taken as a given that oil use has been curtailed rather dramatically. We have no signs of this being the case, but with Brent at $90, down from $125, the conclusion is taken as gospel.

 

And then there is the United States. We have an amazing transformation going on in this country. We have found much more oil than we ever expected even two years ago. If I had told you in 2009 that North Dakota would surpass California and Alaska in oil production to become No. 2 after Texas, you would have laughed at me. The reason it hasn't passed Texas is that as great as the Bakken has been as a place for light sweet crude discovery, Texas is even better.

 

Yet I don't know a soul who says, "Look, one of the major reasons why our oil market has fallen so much is that we have too much of it in the pipe."

 

In other words, that demand, or the lack thereof, isn't nearly as important as the excess of supply.

 

It's not just the U.S. that might have a production glut. The Saudis have always been determined to make it so that we don't develop our oil and gas reserves. They have done it by putting pressure on prices when they reach levels that allow us to be more economic in our drilling. In the last few years, the floor on where we will still drill aggressively is about $80, because if the oil companies can't get more than that, it really isn't worth it.

 

When you add in that Iraq and Libya are now pumping a great deal more than we thought, we can come up with a mosaic that says it isn't the demand side that's at fault, it is the supply side.

 

So let's go full circle. The people who say it is demand at this point have a vested interest. They have eschewed the group or thrown it away, and we are in the waning days of the quarter when they will have to reveal their holdings. This is a quarter where if you owned these stocks, you were revealed as a stock charlatan. It doesn't matter that we could be on the verge of something big going the other way, big Chinese rate cuts and a potential growth initiative or initiatives in Europe. It's the dynamics of money management that are in play.

 

My take: They are way too depressed to sell. My instinct is to buy them into the end of the miserable oil and gas quarter, and that's what we are attempting to do for Action Alerts PLUS, as painful as it is, and boy is it ever painful. 

 

 

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.

 

 

 

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57Comments
Jun 26, 2012 1:59PM
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I think we need someone to look into why the pump prices are still so high!  I would also like the American people to start asking why we are not using CNG in all our cars by now!  This is stupid that we keep paying such high prices for crude oil from over seas and exporting our cheap CNG.
Jun 26, 2012 1:45PM
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Cramer:    Pay no attention to that big crash that you heard that was the collapse of the banking system just keep buying stock.    Pay no attaention to the fact that Wall Street which was once the engine of the US economy because of its transparency which allowed joe public to invest without being cheated by crooks, and its focus on funding US industrial development is replaced by a system that is rigged to allow the insiders to rape joe public invester and produce ZERO good for the US.   Ef You Cramer.   I put more trust in what the Kramer character on Seinfeld would have to say about investing.
Jun 26, 2012 2:31PM
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Why oil price is sliding?  Simple.  Election year.
Jun 26, 2012 2:03PM
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I'm doing great with my money because it's not in the stock market ! ! ! ! ! ! ! ! ! !

Jun 26, 2012 1:54PM
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we all know the supply and demand theory has been blown out of the water. it used to be if a hurricane was in the gulf that would be the reason, one of the pipelines being worked on we would see higher increase, China using more cars, etc.   then the Arabs say we're not the ones,  big oil gets called in. we're not the ones. so now its the speculators that get the blame.   Look at the timing people.   Its political!!!!   prices drop right after Obama get s going on his campaign.

 

Just like russia and the nukes, "i'm only gonna have one more term, lets talk about things after the election" 

Jun 26, 2012 1:03PM
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never forget the facts:

this hack said buy oil at 105 because it was going to 150

he also recommended gold at 1900

LOOK IT UP...DON'T TAKE MY WORD FOR IT

this guy is a crook

Jun 26, 2012 12:45PM
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Natural gas is holding at the economic equivalent of the cheapest coal out there, which I believe is Wyoming strip mined.  If fracked wells continue to produce and glut the market, then at these prices more users will choose natural gas over other energy sources.  Considering that you can have both natural gas and diesel for heavy duty vehicles, coal or natural gas possibly for trains, coal or natural gas for power generation; then what is to stop both from being used allowing greater flexiblility.  Something to consider when major decisions are being made.

Jun 26, 2012 11:08AM
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then why hasn't the price at the pump gone down?!?!?!?!!?!?!?
Jun 26, 2012 4:53PM
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We don't need to figure out "Alternitive" means. What needs to happen is the car Companies need to do what we know can happen. That is BETTER MPG. No reason a 80,000 lb Semi gets 6-7mpg and a Chevy 2500 4x4 gets 10. There's only about a 70,000 lb difference. get the MPG up we won't need as much oil. Simple.
Jun 26, 2012 4:46PM
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I have worked in the petroleum refining business since 1993.  I can tell you this fact:  There is a glut of crude oil in the world.  It has been building for many years.  Yes, people are driving less, cars are getting better mileage, and now there are alternative fuels out there.  There are a vast mixture of reasons for lower crude oil prices.  This ALL equates to lower prices at the pump.  We need to continue to conserve gasoline.  We need to put enormous pressure on the Middle Eastern countries that produce crude oil.  These are only 2 methods to reduce our need for crude oil to be refined into fuels.  There are many others.  We need to continue to research alternative sources to gasoline.  These simple measures will work, but we need to never give up or give in.  Believe me when I tell you these things.  I'm a consumer too. 
Jun 26, 2012 1:30PM
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facts hurt when they are in opposition to your scam
Jun 26, 2012 6:17PM
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It's a conditioning process. They raise the price to outrageous levels for some stupid reason, then they lower it a little making us think they are doing us a favor. Then they start the cycle over again by raising them higher than the last time, then a little lower. And on and on and on.

 

Wake up America. When the oil companies continue to post record profits, even when they lower the price, they are conditioning us for future ripoffs. It doesn't matter who is in office, the consumer will never win this game. So just forget about trying. It's like anything else, voting only replaces one thief with another. They don't care, as long as they get their free ride.

Jun 26, 2012 4:43PM
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lol
and yeah, I am the first paragraph.  As soon as crude went over $85 I called BS.  It's a different world, the American middle class is broke and has much less access to cash and credit.  When that monumental fact sinks into Cramer''s head, he may begin to understand the bigger picture.  The last few years he's just been reactionary to the cycles as they come and go, with no wisdom or insight.  The boom times made him look smart, the hard times show him to be what he is.  Another loudmouth salesman who gets lucky every once in awhile.
Jun 26, 2012 4:36PM
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Unleash the energy of America for exploration and production of fossil fuels.  Why wait until the wind blows?
Jun 26, 2012 12:12PM
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stewie,

if you think he is credible try following his recommendations

 

before cramer came on and screwed up my enjoyment of watching the msnbc ticker

i wasn't even aware of his scam

 

as i was watching the ticker i observed more and more how crooked this arrogant hack was

 

now i point out his horrible picks everyday on this site hoping to save anyone who is unaware of his scam......i HATE to see hacks make money at other's expense

Jun 26, 2012 10:22AM
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Oil goes up, oil goes down, gold goes up, gold goes down, so what's new.
Jun 26, 2012 3:01PM
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IF THE SEC HAD ANY CREDIBILITY THIS GUY WOULD BE IN JAIL
Jun 26, 2012 11:32AM
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this chump called for 150 dollar oil when it was at 105

 

how does he keep sucking people in?

Jun 26, 2012 1:24PM
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BLAH, BLAH BLAH

 

No one listens to you dork!

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I can't belive anyone follows any of these hacks!  Let me set this straight.  These "hacks" tell you to buy and sell, therefore commissions are being made.  They tell you to do this daily, so they get commissons daily.  Then they tell you to buy their $700.00 news letter.  Again, money being made.  The loser in all of this?  YOU!!  If you were a member of Congress, you could get a free pass on the "insider" trading!  Has for Dan Mills, who keeps posting everywhere about the "penny Stock" , quit posting, your a moron!  Buy some gold and sit back and watch the stock market crash!  I keep seeing a total lack of fundamentals for investing and can also see the stage being set for another 2008.
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