Oil….Buy The Stocks, Skip The Crude

As the markets close, oil stocks are rebounding nicely from yesterdays close. Encana is up 3.5%, Canadian Natural Resources is up almost 6%, Petro-Canada up 1.75%, Talisman up 3.25% and Suncor up 3.5%. The TSX came close to wiping out yesterdays losses up 1.6% on the day.

Interesting that these stocks are up on a day when the underlying commodity was down slightly on higher than expected supplies. Economics 101 would suggest that when oil goes up, so should oil stocks and vice-versa.

The markets are taking note that perhaps the 20% – 30% drop in the above-noted blue chip names may just have been overdone. At first glance, you may not think so as crude has dropped from its $147/bbl high to $118 in this short time frame representing a 20% decrease.

I went back a year and looked at the charts on Crude oil. Amazingly, crude oil was trading at about $63/bbl. Oil has nearly doubled even at todays levels in just over a year yet the response from these blue chip oil companies has been negligible.

Encana is up 15% year over year. Canadian Natural Resources is up 10%. Suncor is up about 15% while Petro-Canada and Talisman have negative one year numbers. These companies are swimming in cash right now but dont reflect the nearly doubling of prices in the last year. Sure, the new Alberta Royalty Regime comes into effect next year and can explain part of the lower pricing. But, surely these companies should have nice price increases with the upward trend in crude.

Last month was probably the worst month in recent memory for Long/Short hedge funds that were short financials and long commodities. The unwinding of that position created unusual spikes upwards for financials and the reverse for oil stocks. As the unwinding of those trades comes to an end, expect more normalized trading patterns and higher prices for these oil stocks all things being equal.

What are your thoughts on the current prices of oil stocks? Do you think they are going higher from here?

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2 Responses

  1. Wow, $63 a barrel a year ago. It feels like we have been paying high oil prices for much longer than that. It is amazing how oil doubled in only 1 year. Let’s hope we don’t see the same trend through to next year.

  2. I believe the oil stocks will be sought after as a place to put your money even if the barrel price slides to $80.00. That’s still making good money on each barrel. Why I say that is money will be coming out of bank stocks because of the credit crunch and mortgage debacle in the USA. We have a long way to go before that problem is resolved. Canadian banks will suffer collateral damage due to the fallout of the US Financial sector.

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