Some chatter in IBD on the 3rd regarding Crude's reversal and how it could revive beat-up oil stocks...some one asked for this a few days ago...not sure if it had been posted yet.
Finally, after months of plunging prices, crude oil has become more of a two-sided market. The much-bally- hooed plan by producers to cut production has provided the market with a much-needed boost. Investors can't ignore the huge swings seen the last few weeks in oil prices. Oil's impact- goes far beyond the futures price. It affects all the sectors of the oil industry, other energy-sensitive industries and, of course, the entire economy.
On March 23, oil players awoke to some jarring news. Three major oil producers - Saudi Arabia, Venezuela and Mexico - formed the nucleus of a production-cutting deal. After a year of surplus production, the market might finally be brought closer into line.
The Riyadh Pact, so named for the location of these top-secret talks, was big news. Players were astonished to see Mexico at the table in Saudi Arabia. Mexico isn't a member of the Organization of Petroleum Exporting Countries, and many took note of its key role in a deal to restrict output. Pumping 3.42 million barrels a day of high-quality crude, Mexico is certainly suffering from the price collapse.
The Riyadh Pact spread to include a long list of oil exporters, including other producers outside OPEC. The pact's goal is to cut output by a total of 1.725 to 2 million barrels a day among 16 producers. So far, 1.5 million barrels a day have been cut.
While that goes a long way to mopping up the daily excess, it doesn't go all the way. Oil experts say that before the Riyadh Pact, production beat usage by 2.5 million barrels a day. So, recent cuts of 1.5 million barrels a day mean that a million barrels a day are still going into inventory.
On the New York Mercantile Ex- change, the active nearby futures con- tract went flying. Since it bottomed March 17 at $12.80 a barrel, crude oil futures shot up nearly $3, or 23%, to $15.78. It soared as high as $17.50.the day after the Riyadh Pact was announced.
What does all this mean for U.S. stock market players?
That all depends on how you view the oil deal and the oil market. Not everyone thinks the lower output will mean sharply higher oil prices from here. But investors drawn to oil stocks these days are lured by value, not momentum. Most oil stocks are down and dirty.
Hugh Johnson, chief investment officer at First Albany Corp., has some confidence in the oil rally, and that leads him to oil stocks. "The good news is that oil stocks really retreated to levels which are arguably cheap. Their performance has been very poor until recently.
"In a market where it's becoming increasingly difficult to find value, one could argue there's value in energy stocks," he said.
Johnson has increased the weighting of energy stocks in portfolios under his management to market-weighted from underweighted. "Energy stocks are 9.1 % of the S&P 500. We had a lower than 9% weighting. Now it's back to 9%."
Johnson heads up First Albany Asset Management, with almost $400 million under management. "Our list includes Atlantic Richfield, Phillips Petroleum, Weatherford Enterra and Coastal Corp."
Houston-based Weatherford Enterra Inc. is an oil services company. Coastal Corp., also based in Houston, produces, refines and transports oil. Johnson especially likes the "pipeline companies" such as Coastal.
But Johnson isn't getting too aggressive in energy stocks. He expects crude to range from $16 to $19 a barrel, "But Asia is an ongoing worry."
In fact, Johnson isn't convinced that we've heard the last from the Asian contagion. And he thinks oil prices are vulnerable to events in the Far East.
"The Asia situation is a sector-by- sector, stock-by-stock issue. You have to make some hard guesses on the economic fallout from the crisis," he said.
Some analysts warn that the recent output cuts aren't enough to protect crude oil from further losses.
"I'm not convinced that the trends have turned up," said Robert Robbins, market strategist at Robinson-Humphrey Co. in Atlanta. "The most likely case is you'll see oil in the vicinity of the lows ($12.80) and then another bounce." But he doesn't think prices over $20 are sustainable.
"Our approach is to look in areas where earnings, fundamentals and technicals are superior," he said. The first group he mentions is oil services. It ranks a miserable 174 out of 197 industries tracked by IBD for six-month price performance. And the group's 12 month relative strength rating is a dreadfully.
But that group was hot from October '95 to October '97. During, that time, crude oil soared from $16.80 to $26.80, back to $18.35, and then to $23. So oil services did well as crude moved both ways.
Robbins is impressed with oil services companies' fundamentals, which go beyond the price of oil. "They, did something dramatic over the years. They cut the price of finding oil and gas in half." First, some big leaps in technology made it easier and cheaper and less risky --- to find and retrieve oil. Also, companies in the sector have cut costs to the bone.
Rao Chalasani, chief investment strategist at Everen Securities Inc. in Chicago, also likes the services sector, as well as drillers. He cited oil-and-gas driller Ensco International Inc. of Dallas. After peaking in November at 47, it plunged to 23 11/16 two months ago. it's still wallowing near the bottom, closing at 281/4 a share.
He also likes Marine Drilling Co. The Sugar Land, Texas-based driller crashed to 13 '/,, Jan. 12 from 36 in mid-October. It's since recovered to 23.
Chalasani does not like the big international integrated companies. "They haven't come down as much as we would have liked," he said. Exxon Corp., for instance, soared to 70 March 23 --- the first trading day after the Riyadh Pact was announced. It traded at 28 in July '94. If one is drawn to oil stocks from a value perspective, this area won't work for you.
Finally, First Albany's Johnson points out that huge moves in oil prices have huge ripple effects on almost all sectors of the economy, including the stock market. Energy is such a basic input for manufacturers that he's hard pressed to come up with one that's not vulnerable to higher oil prices.
"It obviously directly affects transportation - airlines, trucking - for better or for worse.
" But it goes well beyond that. Oil prices significantly affect prices at the pump, and thus affects overall consumer spending".
|
