Oil Heads Lower with Gulf Stocks: Buy Both on Weakness

Gulf stocks have taken a beating over the past week with pressure on hydrocarbon prices giving investors packing up for the summer another reason to sell.

Oil prices could move even lower. After all, $60 would have been considered a very good price 18 months ago and the global economy has changed dramatically for the worse since then.

Roller-coaster ride

Of course, the pattern of oil prices has been more of a roller-coaster ride over that period: up to $147 in July, down to $33 in December and then back up to $73 last month. Gulf stock markets followed a similar pattern but without showing such a sharp recovery this year.

It is far from impossible to see oil striking another low before recovering again. There are record oil stocks on land and floating at sea which could easily be dumped on the market in a panic about prices, exaggerating the downside. Even Iraq has restored pre-invasion production levels.

The recovery in demand for oil this year also seems to have been driven by stockpiling and not an upturn in the global economy where trade has actually seen a bigger slump than in the 1930s. With business down and economies shrinking all over the world it is hard to see where sustainable energy demand could emerge.

That perhaps accounts for caution among stock market investors in the Gulf States, with shares in Qatar yesterday trading at their lowest levels for two months. But clearly the risk still seems to be to the downside if hydrocarbon prices are now in a down trend.

It is remarkable, not to say almost unbelievable, that oil and gas prices have surged while the global economy has tanked in a way not seen since the Great Depression. Even Chinese exports fell 23 per cent last month, falling for the ninth month in succession.

Economic fundamentals

Last month US auto sales registered their smallest year-on-year decline since Lehman Brothers crashed last September, but that was still 31 per cent down. German and Japanese falls in GDP will be the worst since the Second World War as their status as major exporting nations is now working against them.

In short, the oil market and Gulf stock markets seem set to repeat the experience of last autumn. The question then is whether global governments can pull off another series of stimulus packages to keep the show on the road, and whether that money will again inflate the cost of energy.

It probably will, and that would make oil assets and Gulf stocks a good buy when markets weaken.

Comments

[Tom Colangelo:]

The market will continue to move sideways based on the numbers and guidance given this week BECAUSE:

1) FIRMS will say nothing or say that the outlook looks better than the recent past. It would be a SELF-FULFILLING PROPHESY if companies with weak Q2 results give negative guidance for Q3. A literal death wish for any firm saying that they won’t improve their numbers even though the economy is beginning to level out and the stimulus is still gaining momentum.

2) The banks will report good numbers because they talk to Geithner EVERY DAY about how they are doing. He is protecting the $1 trillion we have given to banks and financial institutions and for his own sake, must know how the banks are faring. If they were in trouble, we would know about it already because nobody likes surprises.


3) Q2 earnings will be presented as improving month-to-month versus the less favorable Y-O-Y. You will be sold on how things are improving and to forget about t he Y-O-Y because it is not valid in this recession.


The market will meander until Q3 reports. In the mean time, get dividends while you wait for the market to move. Take advantage of this by getting into a strong position in some of the things that we CANNOT DO WITHOUT like:

OIL – BP (Yield = 7.43%), RDSB (Yield = 7.11%), etc.

UTILITIES - ATT (Yield = 7 %), VZ (Yield = 6.4%), VOD (Yield = 6.2%), NGG (Yield = 5.9%), CHL, etc.

FOOD - ADM (Yield = 2.1%), MOO (Total Return = 23.7%)

BANKS - NYB (Yield = 9.3%)

I hold positions in all of the mentioned stocks.

Good Luck.

Jul 13 06:30 AM

[The Greates...:]

The pure facts are clear, people are not buy anything that they do not need. The recovery is a long way off, like all the jobs that have been lost since July 08. Like the old saying goes, “It is time to pay the piper.” The bailouts that went to the too big to fail did nothing for the US economy, throwing good money after bad money never works. The worlds economy is too global for any amount of bailout to work, it is simply too large of a problem. The over all global economy is going to have to go through a trimming down effect, “cutting the fat” so to speak. And that is why America is losing 450,000 jobs a month today, adding to the 10,000,000 lost over the last year. Everything (everyone’s economy and business’s too) that proceeded the July $147 a barrel peak price was based on using way too much credit to get by on. When the bubble burst, so did the global economy. A lot of money was made up to that point, but where did that money go today? All the run up in the cost of crude did was leave the world with higher prices for every single thing manufactured, shipped, barter or sold today. Oil pricing has been on life support since February and will fall between $35-40 a barrel by December.
BTW, 12% unemployment by then also.

Jul 13 09:24 AM

[toobad41:]

I hate to say it but oil does not care about unemployment figures. It is a commodity and a very complex one at that. That being said, oil is used in over 300,000 products and fuel is just one of them. The demand for oil is still high and will continue to be high. We all know that oil is and will always be a cyclic commodity because of supply, demand and pricing. A couple of well placed hurricanes this season will change all of that. Hopefully it won't happen but no one has any prior knowledge of that.

Jul 14 08:29 AM