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Oil: The Real Nutcracker This Christmas

The last year and a half's been traumatic for anything oil related. Consumers are reveling in low oil prices, although they aren’t spending that money in retail stores, while hedge funds are feeling the real pain. 

Oil is below $40 a barrel with the broader consensus looking like it could go lower. Now this is doing a couple things to the market. 

Drilling companies are curbing the opening of any new wells and have stayed stagnant in growth. Forcing them to layoff workers and trying to generate enough cash to pay debts. 

David Hufton at London’s PVM — “The Opec meeting has removed any last hopes of a reprieve for oil and it has added another layer of downside sentiment to commodities in general. The dam has collapsed and prices are in free fall, with devastating consequences.”

The oil market is inherently a boom and bust cycle, this is just one of the bigger busts. Though there is a multi-layered approach to the current oil market, either way it’s either going to get a lot better or a lot worse in 2016.

Generalists Going To Oil To Die

It’s no secret that many top hedge funds have been hit hard by current oil prices. Carl Icahn, for example, was one of them. His top oil holdings are Transocean (RIG) and Chesapeake Energy (CHK). Icahn has taken a tremendous hit as both companies are down 65% and 70%, respectively, this year. 

David Einhorn has a large stake in Consol Energy (CNX), which has fallen 65% this year.  Both of these men have lost billions by holding onto these energy stocks. But they could very well be playing the contrarian angle here. As pundits and analysts cry out about the impending doom of prices, they know that this is the inherent nature of the oil market. This could be an opportunity for massive gains when the oil market rises back up – which is mostly likely coming in 2016.

Established energy companies like Exxon Mobil (XOM) can use this low point in the market to their advantage by buying up cheaper companies, but they haven’t, expecting a better buying opportunity in 2016. It will soon be a buyer’s market.

Exxon now has a 3.8% dividend yield one of the largest in their history. It will be interesting to see how long hedge funds hold onto these paper losses, especially as we head into a new year. 

Others feeling the pain in oil —

  • Mangrove Partners added to its energy exposure by 85% in 3Q
  • Corsair Capital +74%
  • Southeastern Asset Management +68%
  • BlueMountain Capital +47%
  • Hound Partners +28%
  • Carl Icahn +27%
  • 3G Capital +27%