Cramer: Gaming the Oil Trade

NEW YORK (Real Money) -- Know what drives things. Know why your stocks can go up or down. Know the metrics, for heaven's sakes.

There -- that's what I would have said to an exasperated Twitter follower of @JimCramer when he asked me why EOG Resources (EOG) "goes down every day."

That's because sometimes this racket actually makes sense. EOG's an oil stock. It makes money taking oil out of the ground and selling it. When the price of oil goes down, EOG's stock goes down -- because it is an oil company.

Someone else asked me the other day why the banks are rallying despite being hit with new surcharges from the Federal Reserve to continue to stamp out the threat of banks being too big to fail. Doesn't that crimp their earnings, one flummoxed bank shareholder asked me.

Yes, it might if the bank you own is undercapitalized, meaning it can't meet the new standards. But the truth is that banks go up or down depending on interest rates. If rates go higher, they make more money. If rates go down, they make less. Right now rates are going higher. Investors are simply concluding that when banks report results next month, their stocks will go higher, so why not get in ahead of that.

Now, I know that for some of you, this is counterintuitive. Isn't EOG growing its reserves mightily? Isn't Apache (APA) becoming bigger and bigger in the U.S.? Why did your charitable trust sell Occidental (OXY) when it keeps finding oil?

The answer is simple: We live in a world that's dominated by exchange-traded funds. That means an ETF that owns the oil stocks can push all of them down, even if some are doing better than the others are. All oil stocks are linked with the price of oil through those ETFs, which don't discriminate between a company like Exxon Mobil (XOM) , which doesn't discover more oil than it is producing, and EOG, which is finding oil like mad. So, it doesn't matter.

A better question to be asked may be what's behind the decline in oil. When Russia, a gigantic oil producer, could be on the verge of halting exports or kicking out foreign oil companies, when Nigeria, another big producer, faces the possibility of an Ebola epidemic, and when Iraq seems to be one battle away from losing its oil export production, how in the heck can oil be going down?

I think there are two reasons. First, traders think that when the dollar goes up, oil gets cheaper because it is bought with dollars. Now there has been no long-term linkage between the dollar and oil, as my friend and colleague Dan Dicker can tell you, and he's researched it better than anyone has. But short term, it's been known to be linked, so traders send oil down right now any time the dollar goes higher. The dollar's just had an astounding 5% move up against the euro, which has triggered a lot of the selling.

We know that the U.S. is producing a lot more oil than it used to, and that's keeping supply above where it might otherwise be, but I think the world's global turmoil makes oil a good investment, not a bad one. So you want to buy an oil here that you know is doing well and gives you dividend protection to cushion the downside. Which one is that? How about Royal Dutch Shell (RDS.A) , which I just spoke to last week and where things are going fabulously? I say you buy some, accepting that oil could drop but also knowing that if it turns, it could turn wildly. And while Royal Dutch won't fly as high as the coiled spring that is EOG, you will do quite well -- and you are being compensated with an almost 5% yield until it does.

Action Alerts PLUS, which Cramer co-manages as a charitable trust, is long RDS.A.

Editor's Note: This article was originally published at 12:45 p.m. EDT on Real Money on Sept. 10.

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