Cramer goes behind oil’s dramatic decline

There seems to be every reason for oil to rally. Why is it down? And should you pare down on your energy holdings?

Always an advocate for understanding the environment before you make any big decisions, Jim Cramer believes it's critical for anyone holding energy stocks to get a handle on oil, and why the price is in decline, especially when there would seem every reason for it to go higher.

Common sense would suggest the ongoing tensions in Russia, as well as the threat of an Ebola epidemic in Nigeria and the horrific terrorism in Iraq, would all send oil higher, if for no other reason than they threaten supply.

However, oil prices have done anything but advance lately. Over the past 3 months shares have marched from a high of $105 to about $92, where the spot price closed on Wednesday.

What gives?




To make a determination, Cramer dug deep into the market and discovered a very intriguing development.

"The U.S. dollar just had an astounding 5 percent move up against the euro," Cramer said, "which, in turn, has triggered a lot of the selling."

That is, oil as well as many other commodities are nominated in U.S. dollars and as the dollar gets stronger it becomes more expensive for buyers using other currencies. Therefore, the knee-jerk reaction from professional investors has been to sell oil, just as they're selling many other commodities also nominated in dollars.

In turn, oil related stocks have tumbled too.

Oil decline
Henrik Jonsson | Getty Images

But before you cash out of the sector entirely, Cramer says there's something you should know.

"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," Cramer said.

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Therefore, rather than sell, Cramer thinks the current decline may present an opportunity, if you're strategic, and believe, as he does, that global growth will ultimately drive demand for energy over the long-term. If you're like Cramer, you may want to look at Royal Dutch Shell, a stock held by his charitable trust.

"It could drop more, if oil drops more, but it sells at a discount to the other majors. Therefore, if it turns it could turn wildly," Cramer said. "And you are being compensated with an almost 5 percent yield until it does."

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