The price of oil and the future of stocks
Don’t buy the claim that rising oil will crush the recovery, says a U.S. advisory, but do buy bargains on a pullback, like one oil services stock.
The price of oil carries a lot of baggage with it.
As it rises, it brightens the prospects in Canada’s oil patch. It is also the chief prop of a strong Canadian dollar, most experts will tell you.
Yet at the same time it makes things very expensive for many industries and for consumers. And not just at the gas pumps, either.
Yesterday, oil skied up past US$108 a barrel.
This stokes the fears of those who say it will cripple the economic recovery in America and maybe even start another recession.
Calm down, says one U.S. advisory.
While rising oil prices worried the markets into a pullback last month, the markets were due for a correction, says Personal Finance. The editor, Mr. Elliott H. Gue, seeks to put it all into perspective.
“The financial media butters its bread by explaining the market’s movements after they’ve occurred, with a focus on sensationalism rather than reason,” he says.
“Likening higher oil prices to a tax on the U.S. consumer that threatens to crush the still-fragile economic expansion makes for a good story, but the rationale doesn’t hold up.”
He explains why the evil effects of rising oil have been exaggerated. He also points to an oil services stock that he believes is a great buying opportunity right now.
A matter of degree
“Rising oil and gasoline prices aren’t good news for consumers,” this editor admits, since higher costs reduce disposable income and spending. “The question is a matter of degree and severity.”
Gasoline for the car accounts for about 5 per cent of total expenditure for the average American, according to the U.S. Bureau of Labor Statistics. And motor fuel had bulked up to 13.5 per cent of the Consumer Price Index by the end of January. The rise in oil prices will push that higher.
Overall, energy accounts for over 9 per cent of American household expenditure. 3.7 per cent of that is electricity and 0.4 per cent on heating oil and natural gas.
Consumers get a break here. Electricity is closely tied to the price of natural gas. And gas prices continue to languish, says Mr. Gue, thanks in part to the “prolific output” from the Marcellus Shale in Pennsylvania.
Natural Gas Liquids (NGL) have not shot up in price either, and they can stand in for oil-derived naphtha in many plastics.
Gasoline prices are bound to rise over the next few years no matter what happens in the Middle East and North Africa, says the editor. But the effect will be softened by regularly inexpensive natural gas, thermal coal and electricity.
Gas guzzlers
At any rate, rising oil prices haven’t really stopped consumers in their tracks, notes Mr. Gue. Sales of gas-guzzling trucks and SUVs have been greater than sales of passenger cars for more than a year.
The annualized sales for all vehicles reached $13.4 million in February, well ahead of the consensus expectation of $12.6 million.
“Given their spending habits, U.S. consumers don’t appear to be worried about gasoline costs these days,” comments the editor.
There is a point at which oil and gasoline prices will cut into spending, he admits. But the experience of 2008 suggests that this breaking point comes when the price pushes up to $120 or $130 a barrel and stays there for a couple of weeks.
“U.S. economic data remains solid,” he insists, “and panic over oil prices is a convenient excuse for investors to take profits — not a real obstacle to growth.”
Treat any correction as a buying opportunity, he advises.
Taken by surprise
Mr. Gue points to one big buying opportunity with Weatherford International (NYSE-WFT). This oil services firm sends its equipment to virtually every major oil and natural gas region around the globe.
Rising oil prices are giving it lots of work in lots of places. Yet the stock is in trouble.
It’s all about accounting. In one of those “accounting restatements” that companies make periodically, net income from 2007 to 2010 had to be adjusted by $500 million.
Although this restatement had nothing to do with Weatherford’s cash flow or growth prospects, “the bad news took investors by surprise and prompted the stock to sell off.”
This is a chance to get in, says the editor. While the company’s tax rate will go up over the next few quarters, “that won’t prevent the company from benefiting from a massive wave of spending on exploration and production by major oil producers.”
The stock fell from above $26 to just above $20. It has recovered a little, to $22.95. Buy it up to $28, says the editor. It pays no dividend.
In short, he concludes, don’t treat rising oil prices as an excuse to fret about the future — but as a chance to dig for profitable opportunities.
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