$100 Oil? $100 Oil stocks? A Bold Prediction…
There has been alot of speculation about if and when oil will hit $100 per barrel. And the stocks of integrated oil companies (those who control the production and distribution assets from Saudi soil to the mouth of the gas pump nozzle) seem to move up and down in lock-step with oil prices… when will certain of those stocks see the same $100?
While I don’t agree that oil stocks should move up and down with crude prices, I have to admit the price of oil was one of the legs of my oil stock buying strategy. Last January, the morning oil fell below $50, I bought Conoco Phillips and Exxon Mobil. I had waited for weeks for that moment, and it didn’t last long: Both began to move up immediately as oil barrels increased in price. Oil moved much farther up, from that morning until the $83 price we saw recently represents a 60%+ increase in the price of oil barrel… and COP and XOM are only up about 25%-30%.
About a month after I bought these stocks, I read an article where Berkshire Hathaway (Warren Buffet’s outfit) had begun buying COP around the same day I did, and within weeks had amassed $3 billion in shares. Suddenly I felt that my “buy below 50″ strategy was validated. But the truth is, it is way oversimplistic.
COP and XOM are doing well because oil is high. But they always do well regardless of the price of oil. Why they are doing well right now has more to do with economics.
Steve Forbes subscribes to the theory that oil prices are high because the dollar is weak, and there are alot of dollars in circulation. More dollars are chasing after the roughly same finite amount of oil (think OPEC production controls, and an unprecedented global demand… China, India), so the price of oil goes up. More dollars make our currency worth less in the global marketplace, so that in turn drives up the price at the pump. Also, big oil companies can bring profits in as more valuable currencies and convert them to larger amounts of dollars, thus inflating profits further (then do the opposite when the dollar is strong).
I agree with this because it makes sense to me. So, when I saw the fed’s recent rate cut and the release of even more dollars into the market, I knew that the usual seasonal plunge in oil prices was going to be at least delayed. If the price holds firm over the coming weeks, we will quickly be into heating oil season, and there is a good chance that at least 70-75 dollar oil will be with us for the winter months. In fact, the unseasonably warm weather in the northeast and north central states has been the one thing keeping oil futures from moving rapidly towards $90 per barrel.
So… when will we see $100 dollar per barrel oil? If the conditions above persist, by Memorial Day next year. Fed tightening the money supply, interest rate increases, bad job numbers, and slowing in China and India all could slow demand. But none of those seem in the cards right now.
What about $100 a share for Conoco and Exxon? By March at the latest. And if we get a cold snap that depletes natural gas reserves, much sooner. You heard it here first.
Disclosure: As of publication I am long XOM and COP
