Trader Talk

Oil tanks: A nightmare for energy bulls

Stephen Strathdee | E+ | Getty Images

Energy: Lower demand and plentiful supply a perfect nightmare for energy bulls.

Today's weekly oil inventory numbers showed a huge build in oil inventories. Oil promptly dropped. Brent crude dropped below $100 and is now at a 17-month low.

We have a perfect nightmare for energy bulls: Lower demand and plentiful supply. This, despite the fact that we are only one day away from some potentially crazy development in the Mideast.

Watch shale plays. Companies like Whiting Petroleum (WLL) or Diamondback Energy (FANG) are getting hit hard this month...WLL down 10 percent, FANG down 12 percent. Why? Because oil prices matter. West Texas Intermediate is at $92, the lowest in eight months. As you start getting into the $80 range some of these shale plays don't work. These shale plays involve deep drilling, they're complicated, and they're still very expensive to drill, though less expensive than they used to be.

In addition, refiners are getting hit hard...yesterday the Brookings Institute yesterday came out in favor of removing the ban on export of oil. They noted the refiners will get hurt because West Texas Crude (WTI), currently at $91 and change, will then rise to the price of the global benchmark Brent Crude, currently at $98.Long-term, U.S. refiners will lose their cost advantages...they can buy oil at a lower price right now than, say, their European counterparts. That advantage will shrink if exports are allowed.

There's a larger problem for energy: There is not a lot of visibility on demand growth. If you can project how much economic growth there will be...if you have some certainty on what you think global GDP will can create a model that will project oil demand. But without a clear viewpoint on global growth, you are a bit lost trying to figure out where oil should be.

And most investors are completely clueless about what global growth will look like.

Is there any good news? Sure. Lower oil prices is hugely supportive for an improving economy.

And it may not be such bad news for energy investors if prices stabilize. They are drilling like mad everywhere in the U.S., and I doubt that will stop any time soon. If oil prices stabilize, traders will quickly start sniffing around some of these shale plays that have dropped. Diamondback, for example, trades at a relatively reasonable 4.5 times EBITDA, according to traders. Same with Whiting Petroleum.