It’s Impossible to Pay Enough Attention to Oil
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Predictions from one month ago
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Why oil stocks are on the upswing
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Billions of barrels in the Bakken
One month ago, I wrote about the sudden downtrend in oil prices. Of course at that point BP Plc (NYSE: BP) had already been in the news for a few weeks thanks to the oil spill in the Gulf of Mexico. At the same time, the broad market was still reeling from the near -1,000 point flash crash.
Out of all this bad news it seemed as though oil stocks were among the worst hit.
On May 10, I showed you this chart to illustrate how the 13 largest oil companies, represented by the AMEX oil index (AMEX: XOI), were in the midst of a 10% drop in just one week:
I also predicted that prices might drop lower. I wrote:
“This 13 company index could test the year-to-date lows of 990 – but there are also the sub-800 lows of just over a year ago to contend with as well. I won’t pretend to know which lows the index will test, but I’ll look for any reversal at these key numbers as a time to buy.”
Since then, this index blew by the 990 level, and fell even further, down another 12% since May 10:
This index hasn’t tested the sub-800 lows, and there’s no definite rule of charting that says it has to test those lows, especially since this index is not traded.
As far as BP has fallen, it’s only dinged the index for about 35 points since the leak began on April 20th. The good news is that the index is back on the upswing. Once you scrub out BP, the index of the other 12 oil companies is back in the black.
This week, the index is up over 1% - and not including BP, most of the stocks in the index are up as well.
I think this reversal, in the largest oil companies across all sectors, could signal a larger reversal for oil prices, as well as for smaller oil companies - especially those not involved in offshore drilling.
I’ll get to which companies I’m keeping an eye on in a second...
But there’s additional news about oil reserves that makes me even more certain about this trend.
According to an article in The Wall Street Journal this morning, oil prices rose again today due to expectations of a second consecutive week of diminished U.S. oil stockpiles.
Yesterday, the American Petroleum Institute “...estimated crude stocks fell by 4.5 million barrels last week.”
Reduced supply of oil ahead of the summer driving season seems hugely bullish for oil prices - and I would not be surprised if the price per barrel moves from the $73 range up to over $90 a barrel by the end of the summer.
Okay, so I’m cheating a little bit. I cribbed my prediction somewhat from Gregor Macdonald, our Energy Analyst here at Wyatt Investment Research.
Gregor talks a lot about summer seasonality, and how over the past few decades, the price of oil TENDS to have an early peak in April, followed by a moderate decline to early summer lows in June, followed again by a peak sometime in late summer/early fall.
A quick glance at this chart showing oil prices so far this year seems to show that he’s been correct so far:
Will he be correct for the rest of the year? We’ll have to wait and see. But Gregor is the best energy analyst I’ve ever worked with, and he’s right more often than he’s wrong.
So if you’re bullish on oil, today could be one of the best times in 2010 to build a position in oil companies.
And you could do much worse than to buy the strongest companies in the Amex oil index. But I think the potential for profit is better in some of the smaller, land based oil producers.
I’m thinking specifically of the companies currently producing oil in The Bakken region of North Dakota. Right now, there are only a handful of companies in the area, and an even smaller number that are currently profitable at $73 oil. As oil prices rise, these companies will only become more profitable, so it’s the perfect time to build a position.
The best part about this opportunity is that most of the Bakken is in an area known as the badlands. No one wants to live there. It’s largely inhospitable for farming. The terrain is rocky, harsh and remote. I can’t think of a better place to be producing oil. It’s miles from any major body of water, and there are no people. So pollution is way down on the list of concerns for companies there. No matter how politically unpopular it becomes for oil companies, the operators in this region will be somewhat sheltered by the remoteness and lack of population in the area.
If you’d like to read more about his issue, I highly recommend checking out this write-up on our favorite Bakken stocks today. Click here for the details.
Good Investing,
Kevin McElroy
Editor
Resource Prospector
