The drop in oil prices is starting to make oil stocks interesting
Oil prices have taken a 1-2-3 punch over the last three days—which is starting to make oil stocks interesting to me.
Why? Because the big punches–surveys of supply and forecasts of demand from the U.S. Energy Information Agency and the International Energy Agency, respectively–are backward looking. They reflect lower demand because of higher oil prices that peaked (for the moment) at $113.39 a barrel of benchmark West Texas crude on April 29 and at $126.64 a barrel for benchmark Brent crude on May 2. Since then oil prices have tumbled to today’s $98.95 a barrel for West Texas crude and $113.16 for Brent crude. That’s enough to lead to upward tweaks going forward in those demand forecasts—and the tweaks could graduate to revisions if oil falls further in the current commodities rout.
The third punch, hearings in Congress on cutting the U.S. oil industry’s $21 billion in tax breaks as part of any budget deal, grab headlines and allow politicians to posture for constituents, but the effects of this kind of political circus are almost always short-term.
Here’s a blow by blow of the first two punches. Read more
Next week it’s oil, oil and more oil earnings. To know where the industry is going, forget profits and look at capital spending
Exxon Mobile (XOM). Chevron (CVX). Royal Dutch Shell (RDS.A). BP (BP). ConocoPhillips (COP). Noble Energy (NBL) Apache (APA). Petro-Canada (PCZ). All these production companies report quarterly earnings next week.
Add in drilling equipment and oil service companies such as Smith International (SII), Oil States International (OIS) and National Oilwell Varco (NOV) and you’ve got quite a week for oil.
Move over technology, it’s time oil stocks get their fifteen minutes of fame. But what’s most important next week isn’t the topline earnings per share numbers that will grab the headlines. If you really want to see where the oil market and oil stocks are headed, concentrate on what these companies say about their capital spending plans for the rest of the year. That will tell you whether oil company CEOs think we’re seeing a real, sustainable economic recovery that will keep oil prices climbing or a temporary gusher that will dry up in a few months. Read more
