Mad Money

Oil is going to get worse before it gets better

Why Cramer isn't smitten with oil stocks

As oil breaks through $50, those oil stocks sure look tempting don't they? There is chatter everywhere that maybe the selloff in oil stocks could finally be overdone.

Back away from the oil stock. Do not touch, by order of Jim Cramer.

The problem is the numbers and the ratings. They have not come down yet, and they have to.

"That is a deadly combination because it means these analysts are your enemy on any advance as they can't justify their positive bias with numbers that need to be cut, and cut sharply ahead of earnings," the "Mad Money" host said.

Lucy Nicholson | Reuters

To clarify, things have not been rosy in the oil patch; there have been cuts, though not enough, in Cramer's opinion. For instance, offshore drillers such as Seadrill have cut their distributions. Additionally, stocks like Encana or Sanchez have collapsed as investors perceive that they are overstretched after paying too much for properties.

But Cramer thinks this group was overhyped before the collapse of oil.

For instance, Cramer used the example of U.S. Silica to illustrate the situation with most energy companies. Silica was trading at $67 back in August, right before the energy collapse. It briefly traded at $73, and now trades at $26.

But here's the issue—U.S. Silica also traded at $26 back in February 2014, when oil was at $97 a barrel. So was it completely undervalued back in February, or overvalued now? Cramer thinks it is the second option.

Back in August, Silica was working nonstop to alleviate a sand shortage that was supposed to get worse. Additionally, it was ordering train cars like crazy because of a rail car capacity issue. Morgan Stanley anticipated that this stock would increase up to 48 percent by next year.

Those numbers now seem impossible, and even humorous. Unfortunately, U.S. Silica is not alone. Cramer thinks it is the rule, more than the exception.

"Many companies bet the farm on higher prices right into the oil top predicting tight conditions for the next several years. They didn't realize that they were sowing the seeds of their own pricing demise with their success coupled with a rather dramatic decline in demand overseas," he said.

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And it is not going to get better any time soon. Cramer anticipates that the oversupply in the U.S., partnered with lack of demand overseas will get worse before it gets better.

In order to get to what Cramer describes as the "uncertain promised land" of oil, investors should buckle up for more cuts and many more downgrades ahead. Then maybe he will entertain the thought of buying low priced energy stocks.

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