powered by GlobeinvestorGold.com
TORONTO (GlobeinvestorGOLD)—Many investors have probably thought about buying oil stocks given the surge in the price of crude over the past several months. The bad news is that much of that increase is based on war fears and supply disruptions, neither of which is likely to last much longer, which helps explain why stock prices haven't risen as fast as crude. The good news is that there are other reasons to buy oil and gas stocks, and most of those aren't going away anytime soon.
The main reason the sky-high price of crude isn't the best rationale for buying oil stocks is that most analysts don't see the current price—which has come within a hair of $40 a barrel, close to the peak just before the Gulf War in 1991—as sustainable over the longer term. And that means any increase it might cause in oil and gas stocks wouldn't be sustainable either.
According to most oil experts, the price of crude should be closer to $25 (U.S.) per barrel than the $40 range, based on pure supply and demand. Of course, crude oil is also one of those commodities that are driven by speculation on the part of professional traders—in this case, speculation about what might happen in the event of war with Iraq. Those concerns come on top of fears about a disruption in supply from Venezeula and high demand for heating oil due to the weather.
If the U.S. goes to war with Iraq, and the conflict looks as though it will be relatively brief, most industry watchers expect the price of crude to revert to a more normal level—particularly if the other members of OPEC step in to make up for the lack of production from Iraq, as they have said they will. If the weather warms up, as it usually does, and Venezuela gets its production disruptions under control, that could easily put the price of crude oil back in the mid-20s.
The fact that investors aren't betting on a long-term rise in crude prices is amply illustrated by looking at the TSX index of energy-related stocks. It has climbed 13 per cent since October, while the price of crude has rocketed upward by more than 60 per cent. Even major producers such as Canadian Natural Resources—which recently reported a quarterly profit that was 292 per cent higher—have seen their shares rise by 25 per cent or less despite the climb in crude oil.
Once the war-related noise is removed from the picture, however, there are still plenty of good reasons to be interested in the oil and gas sector—and the other part of the equation, natural gas, is one of the main ones. It has also been rising to multi-year highs, but based purely on supply and demand issues rather than the political ones that affect oil. Its price increase could also last longer than the rise in the crude price.
According to some analysts, a combination of heavy demand for natural gas due to cold weather and a lack of supply from declining production has produced a kind of "perfect storm" for gas prices. Even if the weather warms up and demand weakens somewhat, it will still take time and a lot of drilling for those supplies to be replenished, to the point where some believe that North American inventories could still be at record lows heading into the heavy demand season next winter.
One of the ways to play the spike in both crude and natural gas is to buy the drillers themselves—the well-drilling and service companies such as Ensign Resource Services and Precision Drilling. Analysts say even if the prices of crude and gas decline, there is enough inventory-restocking that has to be done in both commodities to keep the drillers working at full tilt for the rest of the year. One risk with that strategy is that these stocks have already advanced a good deal this year.
Still, it's worth remembering—if and when war fears recede and crude prices drop—that there are other good reasons to be interested in the sector apart from just the oil price.
Mathew Ingram joined The Globe and Mail's online news team in June of 2000, after spending four years as the Western business columnist, based in Calgary.