NEW YORK (Real Money) -- When are oil prices too low, too low at least to keep helping the stock market go higher? That's what today's session seems to be all about: worries that something could be lurking that could really clobber us.
So let's talk about the downside of a possible oil bust, a bust that's caused by excessive supply, chiefly by the U.S. and less-than-robust demand, centered mostly on slowing growth in China and weakness in Europe.
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First, in the U.S., while there are 34 states that are takers of energy vs. 16 that are makers of energy, we know there are ramifications beyond just simple production. Today, for example, the rails, important market leaders, have been clobbered because many investors figure that we are witnessing the end of marginal oil being shipped by rail. No matter that oil represents 3% of the cargo for the rails or that in some way, fracking sand is a bigger ticket. We know that rails are factoring in continued higher sales for oil and those sales may not come about. Remember, the only places that use rails are where there's no pipe. It's more expensive to ship by rail, so that means oil companies are more likely to drill near pipelines than rails because the marginal cost might be too high. So the worry is real and the stocks were soaring.
We also have industrials that have plunged big into oil, notably General Electric (GE) , which has been noticeably acquisitive in the patch. That was a huge positive four months ago. Today, it's regarded as a negative. JPMorgan Chase (JPM) went from hold to sell. Dover (DE) is a terrific conglomerate that has a very visible oil-drilling component business that's been an asset. Now it is a liability.
Then there are the credit worries. I don't want to finger any one company because we don't know how they are hedged and we don't want to cause any sort of panic, but there are stocks down 30%, 40%, 50% in a matter of weeks and that's not because they are oil and gas companies. It's because they have borrowed a lot of money to drill. That could cause real issues if the price doesn't go up.