What the heck is going on with oil? Can it rebound, or sink any lower? The slow and painful death of oil is just plain torture, and Jim Cramer thinks we have a real problem on our hands.
"Oil's going lower. It virtually has to because next year we'll be pumping much more than forecast—we always exceed forecast, while I suspect that Iran will be doing the same thing, too," Cramer said.
"Only the Saudis can let up. Everyone else is going to go full out to pay the bills. It's a gigantic prisoner's dilemma and the marginal producers will eventually go belly-up," the "Mad Money" host said.
Yikes.
The real problem here is the dramatic shift in oil's direction. After soaring above $100 during the summer, it has gone down almost 50 percent for the year and still continues to fall little by little.
Ultimately, Cramer thinks that the oil torture will cure itself. Before Cramer explains how that will happen, let's take a quick history lesson to provide further context.
In July 2008, oil soared to $140, thanks to a few hedge funds. After President George W. Bush announced he would lift the drilling ban on the Gulf of Mexico, oil quickly dropped down to $32 that December, against the backdrop of the financial crisis. Many analysts said it was due to a strong U.S. dollar and weakening European economy.
Sound familiar?
"In fact oil was too high in the $140's and too low in the thirties, but we were in the midst of the Great Recession so it made sense," Cramer added.
This time is different. Europe and China are sliding, but the U.S. is producing double the amount of oil that it was when it hit the $32 price mark in 2008. Oversupply is a real issue for the market, which is putting downward pressure on prices.
Cramer suspects that if oil were to go down huge over a couple of days, that will send the down in a big way. Additionally, marginal producers of oil will go belly up. At that point, investors will see the damage and rubble and know how to react to it.
So how does this torturous decline in oil end?
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Let the problem cure itself. Let Venezuela, Libya, Iran, Iraq, Nigeria and Russia stop drilling out of fear of not being paid. Then they will run out of oil, which will take down the supply by 2016. That will send crude bouncing back in 2015.
But it certainly won't happen in 2014. Not now, and not at these prices.
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