Five Years of Oil Price in Stock Prices

Stock prices of Mega Cap buy recommendations including ExxonMobil (XOM) and Total S.A. (TOT) are likely to be higher by the turn of the year if the five-year pattern of oil price and stock price continues. Since 2003, stock price has marched upward with the price of oil for delivery over the next six years. Recently, a particularly wide gap has opened between oil price and stock price that we are sure will narrow, though we can’t be as sure of when or how. To measure oil price in stock price, we multiply McDep Ratio times our assumed long-term oil price in our calculations of Present Value, the denominator of the McDep Ratio. For example, if the price of oil was $60 a barrel today, we calculate that an investor who bought all of Total S.A. at the current McDep Ratio of 0.60 could expect to earn 7% a year before adjustment for inflation and financial leverage.

The End of the Decline, Georgia and Supply/Demand
A more immediate question may be when might the current stock price declines stop? Our optimistic response is now, the month of the 26th anniversary of the turn in 1982. Seasonally, October may be a bottom. By the four-year election cycle, the bottom may be two years from now. That seems too pessimistic because the stock market has already been declining for a year and recently has taken oil stocks down as well.

Meanwhile, in the news currently, the conflict in Georgia is lamentable for the tragic loss of lives. Otherwise it looks, regrettably, like political game playing. As a result of Russia reasserting its influence in the Caucasus and Caspian region, there is risk to the availability and profitability of oil and gas supply from Kazakhstan, Azerbaijan and Turkmenistan.

On the supply/demand front, world oil production may be breaking through its 85 million barrels daily (mmbd) ceiling for the past few years, but then it may not be. The U.S. Energy Information Administration earlier reported that production exceeded 86 mmbd in February and in March of 2008. Last week’s monthly update revised those numbers back down in to the 85 range. Summer U.S. oil demand is reported to be down 2% while world oil demand is up 1%. Recent world demand estimates are more unreliable than supply. Longer term we believe in global growth in energy demand and constrained supply of easy-to-refine oil.

Oil Price above 200-Day Average
Current quotes for near-month, twelve months and 72 month oil are $113, $114, and $112 a barrel compared to 200-day or 40-week averages of $110, $110 and $106 respectively. Amid signs of slowing economic activity the trend could be flat for awhile as it was during 2006.

Originally published on August 19, 2008.

Comments

[fxtrader07:]

Paul&Shark, the only real guru,magician,piker,si... man has spoken.
Sure. The author's article is at least based on some reason, historical observation and dot-connecting.
Paul&$hark's view, obviously, is wild guessing after reading too many doom-articles

2008 Sep 08 10:19 AM

[whisperonth...:]

We all just guess. But to imagine oil as not being a necessity, even with alternative fuels? HA! Plastics. Tires. Asphalt. They can't build those things with ethanol, hydrogen, or natural gas, and they sure can't do it with wind, water, and nuclear power. Oil is here to stay. You just have to figure out where you want to make your bet on the alternatives, carry both and you should be fine.

2008 Sep 08 11:39 AM

[henarl:]

I have had days when I made more than $14,000 - and I have had days when I lost more than $14,000. So what? The important thing is how much more (or less) you have at the end of the year (or five years) than you had at the start, and whether it's enough to beat taxes and inflation.
Short term gambling may be an adrenaline rush but it's not how you get rich.

2008 Sep 08 12:24 PM

[john s. gordon:]

whisper - all these things can be made from coal & were so made up to 1945 thru the magic of chemistry.
> jack

2008 Sep 09 08:46 AM

[Nik in NC:]

So many people practice dishonesty and deception, and are stupid. Why should not the stock market reflect these characteristics. Of course Oil is a big part of the stock market. Yet, knowing this, many of us still take our chances. It's the only game in town. Would you rather get into Real Estate??!

2008 Sep 09 10:39 AM

[tipalia:]

true john s. gordon but why do they use oil today? just don t talk to make noise only.We all know that Whisper made a good point. Henarl also raised another good point . I do not think that you are taking a chance Nik if you don t throw all your money at once. Buy a few shares of a stock you like ,buy a few more when it goes down etc,,, especially if your stock pays a nice dividend.That s what I am doing now with CVX. Good luck all.

2008 Sep 09 11:17 AM

[john s. gordon:]

my comment was incomplete, they made tires from natural rubber & still do if you want good grip in the rain,

user - the petrochemical industry of the 1950's was established on the basis of 3.00/bbl oil (it was available from saudiland @ 25 cents plus shipping but imports were outlawed by ddeisenhower to protect the houston oil millionaires) and inertia rules.
> jack

2008 Sep 09 12:50 PM