Oil: Is It a Bullish Rally or a Sucker's Rally?

Oil, like many investment vehicles, had been battered along the hard road from peaks in 2007 nearing $150. The fall in fact, had been so dramatic that prices for the commodity were down to $34 a barrel in February of this year. Set against the backdrop of American economic problems and the ongoing 'Carpocalypse' the slide in oil is completely understood.

However, of late, things are changing, and with a resurgence of market participation in the last 2 months, oil has enjoyed a steady climb and has now almost doubled off its lows. The traditional American big oil names have held steady as Exxon Mobil (XOM) is down 5% in the last 3 months, and up 1% in the last month, while competitor Chevron (CVX) has been virtually flat for 3 months. Nothing to light the socks off in any portfolio. These big names, which have enjoyed such outlandish record profits in recent years, are being propped by their cash and their dividend payments, but none of that spells growth during a bullish run on the markets in this still economic headline-driven marketplace.

What has been making noise are the smaller players. In the oil and energy business, small is of course relative. ConocoPhillips (COP), which reported recently an 80% year over year drop in profit has risen 12% in the last month, including a 4% pop on earnings day and its S&P rating of Strong Buy. Not to be outdone, Haliburton (HAL) has rallied strongly with a 34% gain in the same single month time frame.

In Canadian markets the big story of late was the deal stuck by Suncor (TSE:SU) to purchase Petro Canada (TSE:PCA) in a stock deal worth approximately $15Billion. On the news of the deal, Suncor stock fell, but has since rallied back to the $35 level, which is about 6% higher than pre-deal prices. Petro-Canada, the takeover target, has consistently rallied from $30 to its current levels of $45/share. Who says M&A activity is dead?

Shifting to the drillers, the market has seen a similar story. Bigger Transocean (RIG) was outgained by smaller Nabors Industries (NBR). Despite estimate-topping earnings and a buy recommendation from Citigroup, RIG has performed only admirably when compared to gains from its smaller counterpart. RIG is higher by 22% and 10% in the 3-month and 1-month periods, while Nabors has shown gains of 59% and 40% in those same periods.

While the smaller players may have risen faster with the market ramp-up, Investors shouldn't let themselves get carried away, and take some energy-related profits when they present themselves. Headlines are already starting to change from a tone of "Go Bullish Rally" to "Is It a Suckers Rally" and it may just be that over the next couple of months, the staple behemoths of the Energy industry will make the safest investments.

Disclosure: Author owns NBR, SU, recently sold PCA

Comments

[epeon:]

Estimating crude prices is a "black" art which I certainly do not know. However, with the steady effects of oil depletion (estimated at a 5% drop per year in crude production capacity) combined with the virtual shutdown of bring on new capacity that the drop in crude engineered, I believe that crude will inevitably go higher. T. Boone Pickens has argued that crude will be $75/bbl by the end of the year. I have no reason to quibble.

May 13 09:26 AM

[Respirate:]

Concur with epeon. Not withstanding the hourly and quarterly price gyrations, and the concerns of short term market watchers, the mega-trend is higher crude prices. Nobody knows what the price will be at year's end, or next year. Despite that, oil (oil majors) may be the safest long term investment around, due to steadily declining production from the world's major fields, and steadily increasing global demand. Neither of these factors is likely to change.

May 13 10:24 AM

[tworomeo:]

In April 2009 China imported 14% more oil than in April 2008 (sorry I can't supply a link). Matthew Simmons has posted some new presentations to his site on the looming trouble in the oil and gas industry which make me think the energy sector will be a rewarding place for investors to be for the forseeable future.

May 13 10:27 AM

[rick12345:]

No, I think $55-60 should be the norm from here on.

May 13 10:28 AM

[WayneinOregon:]

The price of oil scenario, both short-term and long-term, can change dramatically for any number of reasons. One of the major "wild cards" I see:

Whether the Obama administration starts sending signals it wants to reduce reliance on oil, and look to abundant and cleaner natural gas as a bridge to new, alternative fuels. Apparently, Rahm Emanuel (influential White House chief of staff) is in this camp.

Anything could happen. My bets Oil will pull back from its recent runup, but shortly after begin a fairly gradual upswing in prices over the next 1-2 years.

May 13 01:24 PM

[kertch:]

The short-term price of oil may fluctuate but the long term trend is pretty much set. Whatever energy path we choose: alternatives, conservation, more drilling, or a combination of all of them; nothing but the largest infrastructure investment in history will change the current trend and that would require decades to implement. Unless there is a new unforseen technical breakthrough in drilling and recovery similar to that which occured with NatGas from shale, supply contraints will push up prices for the next decadeas part of a long trend.

May 13 05:08 PM

[True North_:]

As always, much depends on your time horizon. Given the near term economic outlook, and substantial stocks of oil at hand (though that at least abated somewhat this week, with a net drop of some 4.7 million barrels - though there is still 44 million barrels more in storage now than a year ago), there is a strong possibility that oil will be pressured lower in the next few months. If that happens, it probably should be viewed as a buying opportunity. Excess production capacity remains surprisingly tight - as much as anything, I expect, because non-OPEC supplies/capacity are not being replaced or brought on as quickly as before. The EIA estimates that there is about 4 million bbl / day of excess capacity. If / when the US and European economies recover, I expect that will be used up quite quickly. See: tonto.eia.doe.gov/oog/....

May 14 11:16 AM