This service is intended to be a free weekly newsletter, but I just couldn’t let today go by without some communication. As I write, the May WTI futures contract, CLK20, is trading just above $8. To be honest, that is a level that I thought I would never see again in my lifetime, but there are reasons for it. These are exceptional times, and these are exceptional circumstances.
In the immortal words of the Hitchhiker’s Guide to the Galaxy, however, “Don’t Panic!”
CLK20 is a contract for delivery tomorrow, and nobody wants to take physical delivery of oil in America right now. Storage facilities are full or approaching full and immediate demand is virtually non-existent. Longer dated futures contracts and the stock market, however, are working on the assumption that that will be ending quite soon.
That is why the June WTI contract, CLM20, is trading above $22, over two and a half times the short date, and why, despite a drop in CLK20 of around 40%, most energy stocks are only down a few points, if at all. Those stocks have been helped a bit by strong natural gas (something I predicted in last week’s newsletter), but the WTI crude situation is also a one-off and isn’t indicative of long-term prospects.
I still think the big multinationals are worth considering at these levels but would repeat my warning of a couple of weeks ago. Concentrate on the big boys with lots of cash and with plans measured in decades. They have survived a lot in their history and will probably survive this too. That cannot be said of some of the smaller U.S. E&P companies, where bankruptcy is an increasingly attractive option.
Discretion is the better part of valor right now: Buy but buy selectively.
Cheers,
