Mad Money

Cramer uses basic economics to discover the oil patch may be sowing the seeds of its own destruction

Cramer uses basic economics to discover the oil patch may be sowing the seeds of its own destruction

Jim Cramer is worried about the oil patch, and warned investors that what you see is what you get when it comes to crude.

"At a certain point all of this drilling could be sowing the seeds of the oil market's own destruction. This is basic economics 101," the "Mad Money" host said.

Cramer calculated that one of the main reasons why the price of crude has been stuck in the low-$50s is because companies like Pioneer are selling as much oil forward as they can.

Meaning, they are drilling and locking in gains for future production right now. So, if companies are selling into the futures markets, it could mean investors should think twice about buying.

A floorhand works on an oil rig in the Bakken shale formation outside Watford City, North Dakota.
Getty Images

Cramer had other concerns, too. The price of oil spiked fast on the back of news that OPEC had reached an agreement to cut production, hitting nearly $55 a barrel. Meanwhile, the price of oil out five years hasn't had much movement. They both remain in the mid-$50 range.

"That suggests that as much as we might want to believe that OPEC has discipline, the longer-term and in many ways more important markets are signaling that what you see is what you'll get, and no more than that," Cramer said.

He was also wary of Diamondback Energy's secondary offering, with the company selling 10.5 million shares of its stock at $97 to help pay for its acquisition of acreage in the Permian Basin.

Secondary offerings have become a pattern for exploration and production plays. Simply, they issue stock to pay for low cost acreage in premium locations.

Cramer warned to be careful of Diamondback because oil has had such a big run, it may not have that much more room for upside. While the Permian Basin has some of the best acreage, there could be a downside.

The U.S. rig count lately wasn't very comforting, either. It's almost back to where it started this year. After falling to 404 rigs in May, it's now back up to 624. That means the oil spigot has been turned back on. The U.S. certainly won't be able to make up for the 1.8 million barrels in production that OPEC is expected to cut, but it will factor into the balance of supply and demand.

The last concern on Cramer's mind was President-elect Donald Trump. He has put in place a cabinet that favors drilling everywhere, and with the advances in technology, Cramer could only speculate on how much oil they will be able to pull out of the ground.

"So, just be careful here. Diamondback Energy is up 50 percent for the year ... the stuff its pulling out of the ground has to keep climbing before you can get too excited about participating in still one more equity deal from the oil patch. I'm not saying we should turn our backs on this company," Cramer said. "I just want you to be cautious in case this FANG tries to bite you."

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