While the surging price of Petrol is a bane to anyone with a vehicle, the corresponding surge in oil stocks has been a boon to investors who got in at the right time. Like gold, the price of oil has risen dramatically in the last decade.
In January 1978 it hovered at about $14.00 per barrel and has been priced at up to $120 per barrel this year, but is a little under $100 per barrel at this writing in late July.
The Institute of International Finance’s average oil forecast is $115 per barrel in 2011 and $110 per barrel in 2012. Their projection is based on the assumption that political conditions in the Middle East improve and supply pressures ease. An IIF report noted that the oil market is currently tight because of some supply disruptions and increased supply risks. Unfortunately for those experiencing the squeeze at the gas pump, most of the increase in the global production of crude oil is expected to come from the Arab region, mainly Saudi Arabia and Iraq. So how are investors faring?
Oil companies are swimming in profits and oil company shareholders are reaping huge gains. The AMEX oil index is up 45% in the past eight months, so it has been a great time to own oil stocks. Chevron Corp., the second-largest U.S. oil company, reported a larger-than-expected 36-percent rise in earnings recently, as oil prices surged and refining improved.
This is not to say that everyone should leap into oil investments. One financial advisory newsletter, The Growth Stock Wire, is actually bearish on oil right now. Stating that oil and oil investments are cyclical, the newsletter says that oil just might be a little too popular, and that combined with key world economic factors might be the makings for the perfect storm.
The Wire says the oil sector is trading back where it was in 2008. Back then there was unrest in the Middle East, just as there is now. And China and India were increasing consumption, just like they are now. Six months later, oil was trading for $40 per barrel and the AMEX oil index had been cut in half. The current economic conditions are eerily similar.
While it looks like there are a lot of favorable factors to cause one to be bullish about oil, we have to remember that the price of oil is up 60% since September and oil stocks are up 45%. If you buy oil stocks now, it might be a classic case of buying high and selling low. The Wall Street Journal agrees. They say that once the turmoil in North Africa and the Mideast ends, oil prices will fall back like they always do, burning many late-entering investors. However, it’s anybody’s guess as to when the turmoil will end. Although it’s still mentioned on the major news channels, the European and U.S. debt crises are claiming headlines now.
There is one area of oil investment that many stock analysts seem consistently positive about: the Canadian oil sands. Canadian oil sands operators have a goal of significantly raising output by 2020. As reported recently in Barron’s, many Canadian oil sands stocks trade at higher multiples of earnings and cash than international and U.S. oil and exploration outfits, but abundant Canadian reserves justify those premiums. And, to make them more attractive, many Canadian oil sands stocks are trading “well below” 2008 peaks.
Another exciting development that happened in April is the discovery in Israel of what is being called the second biggest oil-shale deposits in the world. The deposits are off the Shfela Basin, southwest of Jerusalem. Dr. Harold Vinegar, chief scientist for Israel Energy Initiatives estimates that there are 250 billion barrels of oil there. This is second only to the proven reserves of 260 billion barrels of oil in Saudi Arabia.
Oil shale has gained attention in recent years as an energy source because it would enable many countries to lessen their dependence on the Mideast for oil, or in some cases, become completely independent. But the picture isn’t entirely rosy. Oil shale mining raises environmental concerns because it is water intensive, emits high amounts of greenhouse gases, and leaves highly toxic wastewater that could pollute groundwater.
However, once operational, the cost of Israel’s production of oil shale would be between $34-$40 per barrel, making it cheaper than Canadian sand oil and Arctic crude oil.
If Dr. Vinegar’s estimates prove correct, Israel could become a very wealthy country, and those who invest early in the Israeli oil shale mining could go along for the ride.