As oil inventories rise and crude prices drop yet again, Jim Cramer thinks it is worth pointing out that oil has become a major battleground, and most of Wall Street is clueless.
“There’s a huge disparity in what we call sell-side forecasts right now, perhaps the largest lack of consensus I have ever seen,” said the “Mad Money” host on Thursday.
Cramer speculated that the discrepancies are partially due to oil analysts at large firms chasing oil as it went down, and reducing targets dramatically once the price dropped.
The reason why the significant range of estimates is important is because commodity projections are the most important key data point used when energy analysts issue ratings and estimates. Money managers use this information to conduct business, and it can make a big difference.
Case in point: The same brokerage houses can’t even figure out if oil has bottomed or if it is going to make a v-shaped or u-shaped recovery. Eight of the biggest firms have radically different opinions on the topic.
Cramer looked at research from Bank of America, Barclays, Citigroup,Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan and Morgan Stanley; and their projections are just plain schizophrenic at this point.
The lowest full-year estimates came from Barclays at $41.50 and Citigroup with a forecast of $35 for the second quarter. The highest forecasts came in from Deutsche Bank, believing that WTI will hit $67.50 a barrel.
That is a range all the way from mid-$30s to high $60s. That inconsistency is huge!
“It’s enough to make you feel as though nobody has any idea what’s really going on. And that’s a major reason why the oil stocks trade so chaotically day to day and even an intraday basis as they did today,” said Cramer.
And the forecasts for next year are claiming the same song and dance. Cramer is seeing the same confusion with individual brokerage houses. For instance, Bank of America had a bearish outlook on black gold, forecasting $44.75 this year. Yet for some reason it is one of the most bullish on actual oil stocks, with 10 buy ratings in the oil patch. What the heck?
The only exception was Goldman Sachs, with its one sell rating for Occidental and a bunch of neutrals. The rest of the big dogs seem to have more buy ratings than sell ratings on oil.
Cramer thinks that in order for oil to find a sustainable bottom, one of three things need to occur: OPEC production cuts, non-OPEC production cuts or an increased demand for oil.
The “Mad Money” host suspects that we might not see production cuts for a while, though. U.S. producers seem happy pumping away at a profit as long as oil stays above $40.
So while no one really knows the direction that oil is headed, Cramer knows one thing for sure: Oil is a major battleground.
“Battlegrounds are dangerous and should be avoided. Why try to play something so difficult when there are so many other stories out there that are much easier to fathom?”