NEW YORK ( Real Money) -- Does the cavalry get here in time? The cavalry that is the growth engine of lower crude prices? Or does the destruction in credit set us back so far that the gains from a lower key ingredient cost and the stimulus that it can provide can't bring us back up to where we were or take us even higher?
On Wednesday, the market decided that the cavalry doesn't get to the market in time and the pilgrims will now be slaughtered.
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I can't be that glibly negative. There are forces at work right now in the only thing that matters, the price of oill, which remind me a lot of the phoniness of both the move in crude to $140 per barrel in June of 2008 and then the plummet back to $60 in November. Both moves seemed false to me at the time because they were too severe, too extreme, too financially driven.
Still, the velocity and size of those moves freaked everyone out as they would today if oil were to stabilize at $60 for the morning and then an afternoon seller in thin trading were to take it down to $55. Oil in real life doesn't trade like that. Only busted hedge funds do.
That's right: I think if, say, we have a 10% drop below where the Saudis said oil would go just two weeks ago, it will be the financial guys who are puking up oil because they keep trying to call the bottom. I think there is fundamental demand nearby, but the problem is that the oil just keeps spewing. The tap won't close even as the hedge funds think it will at every level they make a stand.
I think a lot of the misunderstanding is similar to the misunderstanding the market had about the oil and gas renaissance. The financial buyers seem oblivious to the fact that there is so much successful drilling going on and that it isn't stopping any time soon. They don't understand the remarkable job many of our companies do in finding oil and exploiting oil -- regardless of the price. In fact, some of these stretched oil companies have to pump even more than they thought right now, because they need the cash flow so badly and it's a total prisoner's dilemma: they want someone, anyone, to cut back -- but it darned well isn't going to be them.
The most troubled companies have the least wherewithal to cut back.
That's precisely why everyone looks to Saudi Arabia. It's the only place that can cut back and stabilize the market. Everyone else is going full bore. Otherwise, you aren't going to see a reduction in supply any time soon.
Frankly, it's inconceivable that we will see cutbacks until probably at least this time next year, given that many oil producers have to sell futures just to bring in cash to pay the bills. It's a hook or by crook situation.