October 30, 2006 – With the new politically manipulated and artificially created highs in the U.S. stock markets, which in turn has spurred optimism in other global markets, there has been much accompanying speculation about oil retreating to $40 a barrel oil and even to $20 a barrel (which I think will never happen).
Personally, I think we’ll see a continued rebound in the oil and natural gas sectors in the short term. But long term, I think the much better way to play these markets is not with the major players such as Exxon, British Petroleum and the like, but either with junior companies that have more room to grow both in market share and in price appreciation, and with those companies that will benefit from the inevitable capex spending that big oil will now engage in to sustain future revenues.
Remember last week when I spoke of emerging markets having a savings glut that will need to unwind? Big oil has the same savings glut that will also need to unwind. In the long run, although I don’t believe that we will ever see $20 a barrel oil, investing in the industries that will benefit from the unwinding of big oil’s saving glut makes more sense than an investment in big oil itself.
Number one, big oil stocks are directly affected by the uncertainty involved in geo-political influences on the price of oil. The secret deals that are struck between countries and current and future wars in the Middle East and/or other regions all affect the share prices of big oil stocks in an unpredictable manner. Two, most big oil companies have already had a tremendous run up in stock price. After this rebound in big oil stock prices that we are currently experiencing finishes, it simply makes sense to take some of your profits off the table.
Three, as I’ve stated before in this blog, there is an economic crisis looming on the horizon. When it occurs, big blue chip stocks will be affected significantly. Four, big oil now has billions of dollars to invest in technology, deep sea exploration, and in buying additional rigs. In addition, it means that they now have more money than ever to replace and fix decaying pipeline infrastructure and truly have no excuse not to do so. Therefore, strongly consider companies that provide pipeline infrastructure.
With the enormous savings glut of big oil that they have established due to booming oil prices over the past 12 months, it is these industries that will undoubtedly benefit. That means I would consider companies like Acergy, Keppel Offshore, Ezra Holdings, Schlumberger, Transocean, Rowan, Ensco International, and Kinder Morgan. Furthermore, refiners like Valero and Marathon Oil should benefit from big oil’s windfall. Furthermore, oil refiners’ profits will be much more insulated from a significant drop in oil prices if it happens.
There is only so much oil refining capacity so these leaders can continue to ensure healthy profit margins no matter what happens to the price of oil. All in all, other industries associated with oil but not involved directly in oil exploration and production will benefit no matter what happens to the price of oil. So in the future, it makes their risk-reward setup much better.
[tags]Acergy, Keppel Offshore, Ezra Holdings, Schlumberger, Transocean, Rowan, Ensco International,Kinder Morgan,Valero,Marathon Oil,oil stocks,best free stock picks,Exxon,British Petroleum,politics and stocks[/tags]
J.S. Kim is the Managing Director of maalamalama, an online investment education course that utilizes groundbreaking investment strategies to uncover ignored stocks, asset classes, and global markets to identify the best low-risk, high-reward investment opportunities with the best chance of returning high double-digit and triple-digit gains.