Oil Sensitivities

by: Mike Steinhardt posted on: May 20, 2008 | about stocks: CVX / OIL / USO / XOM    

Oil goes up and stock investors are not sensitive. After all, Exxon Mobil (XOM) and Chevron (CVX) make up about 12% of the Dow. Nonetheless, I have been impressed (in a bad way) that investors don’t seem to care or be sensitive as oil prices increase about 100% in a year.

Conversely, I have been impressed (in a bad way) that investors seem to care or be sensitive as oil prices decrease 1% in a day. I have seen a lot of commentary that suggests investors believe oil prices are peaking and we are ignoring higher oil prices because the future is brighter or less expensive. Of course, there is no evidence of any of that. Oil prices have increased about 20% since the stock market lows on March 17th. Stocks have gone up about 14% since then.

If oil drops 20%, we’ll see $100 per barrel again - a level that scared the hell out of us when oil was at $60. With today’s optimistic market, a decline to $100 per barrel might give us another 20% gain in stocks. If oil rises another 20%, we’ll see $150 per barrel. With today’s optimistic market, that may not be taken seriously either - maybe another 14% gain.

Right now, the only thing that seems to matter is the prospect for lower oil. However, that optimism has been going on for months and as it relates to oil prices, it has been wrong. With each increase in oil, a 20% pullback gets us back to levels from just a few months ago when we were also hoping for a 20% reduction.

Some day all this will catch up with us.

This article has 7 comments! Add yours below...

Mike Steinhardt

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This article has 7 comments:

  •  
    The FItzman
    May 20 07:50 AM
    My Website
    Yup, I have felt the same way. The only thing that confuses me more is that XOM, CVX, and COP haven't rallied strongly, or at least more strongly in the case of CVX and COP (XOM i think is still slightly down for the year!). For some reason, the skimpy crack margins on the refining side has been stated as the reason not to buy these stocks. At the same time, all three have been generating great income, cash flows, and increasing dividends. How people can value these stocks with such small P/E's in a market with oil at $127/barrel and few places to hide from it is quite astonishing.
  •  
    richjoy
    May 20 09:23 AM
    Let's leave the crack spread aside for this theory...

    I've been thinking for a couple weeks about about the relationship between the price of the commodity (use spot oil) versus the price of the oil company stocks (integrateds, E&P, service companies):

    My thinking is that there will be a time when spot oil continues to rise, but oil stocks have peaked--they will stop moving up, and than even start to decline in the face of rising spot prices.

    This would be because when we buy oil stocks, we are buying a MULTI-YEAR stream of future earnings.

    However, inevitably more and more investors will see that alternative energy sources are to become price competitive with oil (even if after taxpayer subsidies); at that time, we will stop buying oil company stocks, and share prices will decline -- even if the spot price of oil continues to climb (which I assume it will until it is clear supply will soon meet demand as more alternative sources come online).

    First, I'm not suggesting this is going to happen in the next year or two; and second, I am going to watch the growth in oil stock p/e ratios, as it would seem a higher p/e assumes more years of growing earnings (at some point an erroneous assumption).

    For now I am going to keep buying the oils; I am also going to hedge by investing in a variety of alternative energy plays.

    Now it is out there...take your best shots...
  •  
    tmb
    May 20 09:53 AM
    I agree. Just like previous problems (i.e. sub-prime mortgages in recent history) that stared us right in the face, this will catch up to us.
    But what I want to know is, if we all know that this is not a supply/demand driven oil market, why is our government not looking to see where the money is coming from that is manipulating it and then close the loop holes on commodity trading?
    And why do they keep saying there is no inflation? I know my bills are up and everyone I know is paying more for everything and are cutting back on all expenditures.
    If this continues, it will catch up to us in a bad way.
  •  
    yosemite sam
    May 20 06:24 PM
    Gold shares have had this type of action for years
  •  
    User 179796
    May 20 11:37 PM
    The OIL PRICE PROBLEM is huge - the inflation is jsut getting started - think about this - it will cost you twice as much to live in late 2009 than it did in summer of 2007 - get that 'double' in just 28 short months - food, fuel, electricity/nat gas/ heating oil and insurance and medical bills - add up all the base essentials and these numebrs be will double...all the in the face of a recession/deep one - we have a confluence of energies underway that is the 'perfect storm' for a major upset of our lifestyle...
    and the pols are sittin' onthier butts - and the Bush admin change teh rules for reporting inflation - had too...isn't that obvious...
    Waht a losuy admin we have in the WH fo rhte last 7 years...
  •  
    texasgolfer
    May 21 01:00 PM
    from my what if view point, I am beginning to think the Islamic cartels and other US haters are determined to destroy the western culture they despise since they do not need our dollars to offset the cost of not providing product. I am sure we stuck the oil producing countries with the same toxic paper held by so many others in their investment portfolios and it is payback time. We really need to thank the Broker/Dealers for creating this fine kettle of fish, olly.
  •  
    Bob'29
    May 21 10:58 PM
    The Ultra Short Oil and Gas ETF (DUG) was UP over 2.5% today It was UP 5.5% from its intra day low today. I think we might be seeing the peak of the speculative froth on oil and a retreat to more "modest" prices.
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