An Oil Outlook for 2011

Don’t read into Tuesday’s decline in oil prices. Cramer thinks the fundamental case for higher oil prices is still intact.

The “Mad Money” host said the issue was a matter of supply and demand of both the related stocks and the underlying commodity. Countries across the globe are buying up oil, which legitimizes Monday’s closing price—a 27-month high. But at the same time hedge funds are selling the stocks of oil-related companies because they think the demand is unsustainable. Hence the declines seen on Tuesday.

“Every time we have a rally here, it’s suddenly unsustainable,” Cramer said. “We heard that all of 2010. I was shocked to hear how quickly it came back today.”

Cramer thinks it is possible that crude could drop to $85, maybe even $80, but that will serve only to bring down the prices of what he thinks are quality stocks, such as Chevron . And in those cases, he said investors should use the dips to buy.

One group that Cramer recommended selling was the drug stocks. Pfizer , Merck and others are rallying, but he sees no catalyst to warrant the move. There’s no overheating of the U.S. economy that would signal a rotation to these defensive names. Further disproving the idea, Pepsi , another defensive play, hasn’t rallied at all despite the company having what looks like a good quarter so far. So the uptick in pharma seems to be false.

Cramer said the market would see these kinds of breaks—“not gigantic sell-offs, but intraday sell-offs”—throughout 2011. Analysts may predict the end of a run in copper or gold or oil, stocks may pull back as a result, but they’ll soon after regain their momentum. One example he used was Netflix , which opened up $5 on Tuesday before declining throughout the morning. It has been slowly working its way back up since then.

Investors then should keep this in mind as the year progresses.

“Don’t run from these stocks if the fundamentals are good,” Cramer said.

Call Cramer: 1-800-743-CNBC

Questions for Cramer?

Questions, comments, suggestions for the Mad Money website?