Oil's the Crux

Oil's at such a crucial level. If we can drive back from the $70 level down to something that's less extreme, we'll still have oil companies that make a lot of money and we won't lose the group. Actually, more important is that oil go to $60 and natural gas go to $5, because the companies that we all follow (with the exception of Exxon (XOM - commentary - Trade Now), Chevron (CVX - commentary - Trade Now), Occidental (OXY - commentary - Trade Now) and Transocean (RIG - commentary - Trade Now) are more dependent on earnings and nat gas swings than on oil.

The issue here is the issue that bedeviled crude when it got to $140 -- the inability to meet the speculative demand for oil, the demand that comes from hedge funds. We simply can't bring it to market fast enough, and the majors have had such a poor hand at playing the hedge fund game and hedging the spikes that we just can't deliver the stuff in time.

Those who do know how to hedge, outfits like Linn Energy (LINE - commentary - Trade Now) or Anadarko (APC - commentary - Trade Now), are a joy because they have gamed the lunacy of a tiny future dominated by heavily margined players -- many of which are playing "break the other players." Chevron can't seem to figure it out at all. An outfit like BP (BP - commentary - Trade Now) should be selling every ounce of oil forward right now because it has said that at $48 its dividend is fine, so it could lock in that dividend for some time.

But I guess it won't. That would be too smart.

The consequence is counterintuitive: If the oil and gas complex behaves, then probably 80% of the stocks out there will do better (coal, ag and alternative energy do worse) in the "intermediate term." That means not right now, obviously, because we don't have any of our leadership today -- oil, tech and finance. (I think that tech will make a comeback fastest, as soon as it falls 10% ... just kidding!)

I know that my central bull thesis -- deflation is still the issue and reflation excluding China demand is low (housing price/auto price), house price stabilization is upon us and earnings are better than we thought because of the weak dollar and job cutbacks -- largely depends on gasoline not skyrocketing, because then we lose demand for everything like we did before.

So, today we lose oil leadership and we lose the $4 attempt at nat gas, so a key leadership group is on the ropes. When coupled with the endless offerings because of TARP confusion and the momentary glitch of tech -- heavens, it's biotech that's moving, the worst group of all! -- oil's a killer today.

But we always have to ask ourselves, is higher energy really good for the market?

Alas, we all know the answer.

At the time of publication, Cramer was long BP and Chevron.

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