I have spent almost every working waking hour since last Friday's crash in oil trying to figure out what happens next. I have spoken to a dozen restaurant CEOs and retailers to get the consumer side. I have talked with many of the major users and transporters of oil. I have visited with the financial people who buy and sell oil and natural gas contracts. Of course, I have spoken to some of the majors, the large independents, the stretched players and the equipment providers.
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And the only one with a really clear head is Mr. Pickens, and he likes oil here. He wasn't crazy about it up high, when demand cratered and producers didn't blink, but he is a heck of a lot more crazy about it now, with new production grinding to a halt and demand reigniting because of the cheaper price.
Now, I am not sure oil can revisit $100 per barrel in the next 12 to 18 months, as Boone said on my Mad Money show Tuesday night. That's a real bungee jump. But the components of this thinking make too much sense.
First, he says that the problem really isn't about supply. The OPEC nations and the U.S. figured there would be demand for about 1.3 million additional barrels of oil a day. Why not? Wasn't this the year that Europe and Japan would rebound and China would accelerate?
The oil producers misjudged just like everyone else. That misjudgment is now being rectified by the cycle. The big independents in the U.S. will radically scale back their drilling programs, something we could tell was already happening when we got figures last night showing a dramatic decline in drilling permits in this country -- a drop of 37% in November from the previous month.
You scale those production programs back, Boone says, and that's the end of the one million additional barrels per year American renaissance that had gone on for the past three years. OPEC will cut back not because the Saudis want to -- they can handle these prices for years. But because the other nations will insist on it. That could happen as soon as the first quarter.
And demand will turn up to take up the slack, as it always does when oil goes down far and fast.
How do you profit from it? Boone's pretty canny about that.
He's implying that the big oil companies that are challenged for growth, like Exxon Mobil (XOM) , which have been cancelling expensive drilling programs, will now realize that it is cheaper to drill on Wall Street than in the Gulf of Mexico or in the Arctic Circle.
They will want to buy, specifically, the best-capitalized oil companies with the lowest-priced stocks that have the most easily produced oil. The three he named -- EOG (EOG) , Pioneer (PXD) and Concho (CXO) -- are emblematic of the shares to buy right now. He doesn't want to deal with the companies that are spending more than their EBITDA to maintain their drilling programs because they could be in dire straits.
In other words, it's not all that complicated. Boom-bust, up-down, whatever you want to call it, we are in the downturn and an upturn will arrive soon enough; it's time to buy quality.
Pretty simple when you put it that way, isn't it?
Action Alerts PLUS, which Cramer co-manages as a charitable trust, has no positions in the stocks mentioned.