Mad Money

Cramer Makes Case for Oil’s Return


Oil will be a big theme in 2009, Cramer said Monday. Investors should buy BP to take advantage.

The price of crude has swung wildly from a high of $147 a barrel to recent low of $33. Many on Wall Street blamed the change on “demand destruction” and Saudi-induced oversupply, but Cramer pointed the finger at hedge funds. Using a combination of illiquid futures and storage, these funds pushing oil prices higher and higher, stopping only after massive client redemptions forced them to sell their holdings as a way to raise cash. That brought prices crashing back down.

So oil has yet to find its natural, market-set price, Cramer said, because hedge funds had been manipulating it. But he thinks there are bullish signs that the commodity will make a strong return this year.

Devon Energy CEO Larry Nichols has said that oil supplies, as measured by actual drilling, would decline significantly over the next few months. Drilling projects will continue to shrink as a result of dry credit markets and an organic self-correction. That should stabilize prices, lending the consistency buyers like to oil companies’ cash flows.

Also on the supply side, OPEC is expected to cut production, and that, too, will affect crude prices.

On the demand side, China’s in the driver’s seat. The country’s searched as far as Brazil, investing in Petrobras , to make sure it has enough oil. And in the U.S., gas prices have come down, enticing Americans to drive more. They’re even buying the gas-guzzling cars they once spurned not too long ago. So that demand destruction everyone talked so much about, Cramer said, has become “demand thirst” at these levels.

More proof that production is declining? Transocean last week reported that only deepwater drilling contracts are being maintained, and that’s because drillers are locked in. Countries around the globe, especially in the Middle East and Russia, aren’t drilling either. It’s just too expensive when oil’s this cheap. And last year’s biggest domestic drillers are strapped for cash, with no way to raise it in this tough market.

So with supply trending down, while demand picks up, Cramer wants investors to buy an oil stock, namely BP . This large integrated oil company should benefit the most once the commodity stabilizes, he said. It’s the lowest-priced stock in the group, and it offers a fantastic dividend yield – 8.4%. The added bonus here is that while waiting for that price stabilization, BP can reduce costs – and you can collect those dividend payments.

Cramer’s charitable trust owns BP.

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