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5 stocks for the new oil reality
What have we learned this year? That $50 oil is a thing of the past. These stocks will thrive as crude prices stay high.
By Jim Jubak
The first two months of 2006 should end any dreams that oil will drop below $50 anytime soon. They make a good case that the new price range for oil is between $55 and $70 a barrel.
Investors now know that fears of a confrontation with a heavily armed and militant Iran -- the No. 4 exporter of crude oil in the world -- is enough to push oil to the $69.20 it hit on Jan. 23. And that relative global "peace," combined with oil inventories running well above average for this time of year, is enough to send oil prices down to $55.
Short of a major global economic slowdown, $50-a-barrel oil just isn't in the cards. Not in a world where fears of a future nuclear Armageddon are closely followed by news that Nigerian militias have taken oil workers hostage and forced Royal Dutch Shell (RDS, news, msgs) to cut its production there by 455,000 barrels a day.
There may indeed be, as the oil bears argue, a risk premium of about $10 a barrel in the current price of oil. In a world at peace, speculators and traders wouldn't be able to use fears of a supply disruption to drive oil prices so high. But those who believe oil prices should be lower keep getting slapped around by the world as it is. The risk premium in oil looks very, very permanent.
And that's important to investors because so many analysts on Wall Street are still using $45-a-barrel oil -- or less -- when they set their target prices for oil stocks. Take Citigroup Global Markets as an example: Even though the investment bank recently raised its forecasts for oil prices in 2006 to $60, Citi is still using $45-a-barrel oil to set its price targets for oil stocks.
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Investors who remember the early stages of the rally in oil stocks know that these stocks moved higher as analysts abandoned price targets based on $20- or $25-a-barrel oil and gradually came to admit that oil prices might be permanently above $30 and then $40 a barrel.
I think we've got one more round of that process ahead of us before oil stocks are fully priced. (Please remember that my picks for my appearance on CNBC are for a six-month time horizon. One thing that will sink oil prices is a slowdown in economic growth and some economists are looking for just that in the second half of 2006. If that happens, you certainly don't want to be holding a big position in energy stocks. But I think we'll get a nice rebound in growth in the first quarter of 2006, which would be good for the stocks.) The longer that the price of oil refuses to drop below $55 a barrel, the more likely Wall Street is to finally admit that the risk premium in oil is here to stay and to gradually move target prices for these stocks higher.
Cheap, safe and sour
That process will help all stocks in the energy sector -- but it will help some more than others. The big beneficiaries of this process are oil producers that are adding big, low-cost deposits of oil to their proven reserves, that have concentrated their production in the securer parts of an insecure world, and that specialize in types of oil that will see the most price leverage from any scares about supply disruption.
In my Wednesday, Feb. 22, appearance on CNBC's "Morning Call" I recommended these three oil stocks that fit that profile:
Berry Petroleum (BRY, news, msgs). Last time Nigeria held a presidential election, an uprising among the Ijaw majority in the oil-rich Niger delta forced a 40% drop in Nigeria's oil production. The same pattern seems to be playing out this year as the country gets ready for elections in 2007. And with violence breaking out in the Muslim-dominated north of the country, the Nigerian army is so over-stretched that it can't provide effective security to international oil companies. Shell, the biggest producer in Nigeria, has already ordered the evacuation of workers from the most isolated parts of the delta.
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