The drop in oil prices is starting to make oil stocks interesting

05/12/2011 4:34 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Oil prices have taken a 1-2-3 punch over the last three days—which is starting to make oil stocks interesting to me.

Why? Because the big punches--surveys of supply and forecasts of demand from the U.S. Energy Information Agency and the International Energy Agency, respectively--are backward looking. They reflect lower demand because of higher oil prices that peaked (for the moment) at $113.39 a barrel of benchmark West Texas crude on April 29 and at $126.64 a barrel for benchmark Brent crude on May 2. Since then oil prices have tumbled to today’s $98.95 a barrel for West Texas crude and $113.16 for Brent crude. That’s enough to lead to upward tweaks going forward in those demand forecasts—and the tweaks could graduate to revisions if oil falls further in the current commodities rout.

The third punch, hearings in Congress on cutting the U.S. oil industry’s $21 billion in tax breaks as part of any budget deal, grab headlines and allow politicians to posture for constituents, but the effects of this kind of political circus are almost always short-term.

Here’s a blow by blow of the first two punches.

On Wednesday May 11 while the markets were upon the U.S. Energy Information Agency released its weekly survey of U.S. oil inventories. For the week ended May 6—note this is last week—inventories of crude climbed by 3.8 million barrels and inventories of gasoline rose by 1.3 million barrels. Makes perfect sense, right? As gas approached $4.00 a gallon at the pump—it hit a national average of $3.965 according to the Energy Information Agency on May 9—drivers cut back. Less gas sold equals higher gasoline inventories and higher oil inventories too as refineries needed less crude.

The next day, today May 12, the International Energy Agency weighed in with a trim to its forecast for oil demand in 2011. The agency cut its forecast for global oil consumption by 190,000 barrels a day. Sounds like a lot but that’s just a 0.2% decline for the agency’s earlier forecast.

Notice the mismatch, however, between the 0.2% drop in forecasted demand and the plunge in oil prices from $113.39 for West Texas crude on April 29 and today’s close at $98.95. Oil had dropped even lower overnight to $95.25 a barrel.

If you think something else might be driving this market besides demand forecasts, you’re absolutely right. Just as it did with silver futures earlier this month, the CME Group, owner of the NYMEX commodities exchange, raised margins this week for crude oil, gasoline, and heating oil futures on the New York Mercantile Exchange. For crude oil futures, for example, margins went to $8,438 per contract to $6,750 effective after the close on May 10.

Let’s see—you’re a trader facing higher margin requirements that will require you to put up more cash starting on May 10, and on May 11 and May 12 you get reports that say oil demand is down. The drop in oil prices on the news undoubtedly triggered margin calls for some traders. You think you might simply decide to sell?

I’m certainly not sure that the commodities sell off is over. Copper hit a 5-month low today. A lot of economists are worried over falling global growth. But at $95 a barrel or so, I start to get interested in oil stocks. Today I find myself looking at shares of Apache (APA), Brigham Exploration (BEXP), Chevron (CVX), and Oasis Petroleum (OAS).

Mostly just looking, but, as I said, oil is starting to look interesting.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Brigham Exploration and Oasis Petroleum as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

 

 

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