NEW YORK ( TheStreet) -- Oil is tanking, down $5 today, while Brent is down more than 8 bucks -- what is going on here?
Two major events have led to this flight from the oil trade -- first, Fed Chairman Ben Bernanke's warning of a "slowing pace of recovery," which is the warning signal that oil relies upon. Second is the announcement by the International Energy Agency that in concert with the United States, there will be a release of 60 million barrels from the Strategic Petroleum Reserve to make up for Libyan shortfalls. This release of supply will occur in the next month.
For the traders, this is an excuse to dump an oil trade that they've been piling into since the unrest in Egypt and which they've been lured into by bullish calls both by Goldman Sachs and Morgan Stanley in the last two weeks.
You can see just how fully the funds are vomiting up crude longs, as Brent oil, the focus of speculative recommendations from the investment banks, is down more than $3 dollars more than the U.S. benchmark WTI today.But the silver lining is also obvious -- consumers and consumer-driven business will benefit from the fall in energy costs. For the investor, it is less obvious, but crucial to see -- this marks a unique opportunity to get into energy stocks that are merely taking a temporary fall and will be building a base of a higher low from 2010 from which to catapult upwards again. Because while the 60 million barrels of oil being released from the SPR may force the traders to puke out positions, it is, in a global demand picture of 87 million barrels a day a mere drop in the bucket, solving nothing. Supply must increase -- that is the bottom line. And if oil's drop is dragging oil stocks with it, that can only set up an opportunity to buy these stocks at levels that you may never see again. Drillers seem to have been the hardest hit in the oil patch and by far the best looking value. My two favorites have higher beta than others in the group: Transocean (RIG - Get Report) and Weatherford (WFT - Get Report). Both are cheap, incredibly cheap for different reasons, but both will see more business than they can handle going into 2012 and certainly 2013. At $17.50 for WFT and $61 for RIG, these are both at BP blowout/Macondo levels, and look worthy of a punt. Oil's drop is part of a bottoming process from the mini-boom we experienced this spring. It is temporary and is an opportunity to target some specific energy stocks.