Saturday, April 02, 2005

It's different this time.

[Yeah, yeah, I know. Keep reading.]

An article titled "Energy stocks can't rise forever".

The article points out the similarities between the tech bubble and the current situation with oil stocks. But it's not that simple.

1 - The valuation situation is completely different.

2 - The supply and demand situation with oil is different than with tech.

3 - Ask yourself how many people you know who are talking about buying oil stocks, versus how many people were talking about tech stocks circa 1998-2000.

4 - We may be at a short to medium term peak, but in the long run we likely have higher to go.

You'll have to decide for yourself. I think Charles Maxwell's opinion has to be considered, he is one of the people I follow.


As evidence that the current craze is less crazy, McVey notes that despite the surge in energy stocks, they only make up 8.8 percent of the Standard & Poor's 500 -- a far cry from tech's 33.5 percent in early 2000. Plus, the price of energy stocks is only 14.5 times forward earnings, compared to 50.6 times in the technology sector as the bubble burst.

Weeden oil analyst Charles Maxwell says it's a mistake to think that oil prices will simply continue upward. Historically, there have been times -- like the present -- when prices climbed sharply, but eventually the high prices curtail demand and slow the economy. For example, notes Maxwell, people stop buying SUVs.

It takes awhile, but when demand slows, oil prices come crashing down, and so do oil company stocks, Maxwell says.

Prices could be particularly fragile now because about $5 to $10 of the $55 price a barrel is being driven by speculation, he says, rather than fundamentals such as supply and demand. In other words, hedge funds are speculating in the futures market because the price of oil keeps rising. But the speculation is driving the price up. If speculators see any hint of worldwide demand easing -- even temporarily -- they could get nervous and pull away. That alone could cause prices to fall.

Consequently, Maxwell suggests that investors avoid putting new money into oil stocks for six months to a year. Then, after oil has fallen to about $45 a barrel and stocks have corrected, he thinks oil stocks will be a profitable investment.

Meanwhile, because of tight supplies and the need to drill for more, he and Charlie Ober, manager of the T. Rowe Price New Era fund, say even today they would buy stock in large oil service companies. Ober says he likes Schlumberger and Baker Hughes.