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Oil substitutes? Try these 5 stocks
Crude prices don't appear to be coming down soon, so oil's alternatives look better and better. As do these companies.
By Jim Jubak
Anything but oil. Any energy consumer that can is looking for an alternative to oil. Since the oil market is saying that oil prices will go higher as 2006 proceeds, there's plenty of incentive to switch energy sources even if switching takes a while.
This economics of energy replacement is the best guide right now to where to put your money in the energy sector. And right now it's yelling, Buy coal stocks.
The economics of replacement is the reason why, even though natural gas inventories build every month, natural gas is still priced at better than $7 a million BTUs. The high price of oil has put a floor under natural-gas prices -- and the price of natural-gas stocks -- that continues to encourage overproduction.
It's the reason that oil-sands stocks -- the shares of companies mining and cooking oil from the oil sands of Canada -- have outperformed even the stocks of hot oil producers. Canadian Natural Resources (CNQ, news, msgs), an oil-sands play, for example, is up 49% in the last 6 months, while Occidental Petroleum (OXY, news, msgs) and Talisman Energy (TLM, news, msgs), are up 39% and 31%, respectively.
And finally it's the reason why coal stocks are my current energy play of on choice. Yes, they've had a huge run, but the economics of replacement say they stay hot until oil prices and oil-supply security improve.
Oil's rough patch
The economics of energy replacement starts with oil. On April 21, oil hit $75.17 a barrel for June delivery -- a record level -- before pulling back in the last few days to $72 on a combination of profit taking and President Bush's announcement that the United States will stop buying oil to fill the Strategic Petroleum Reserve.
But that's not all you need to know about oil prices. The futures market for oil, which prices oil for future delivery, believes that prices in the future will be even higher than they are today. On April 24, when oil for June delivery was priced at $74.53, oil for December delivery was priced at $76.72 a barrel. The oil market is clearly worried about future disruption of oil supplies.
Seems like a reasonable fear. Iran, the No. 2 oil producer in OPEC (the Organization of Petroleum Exporting Countries), is locked in a game of chicken with the U.S. over Iran's nuclear program. (It's not impossible, by the way, that this crisis is being generated by an Iranian regime with deep budget problems in order to maximize the country's oil revenue.)
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Nigeria, the fifth-largest source of oil for the U.S. market, is home to a violent, if politically inchoate, revolt in the oil-rich Niger River delta that has targeted the production facilities of global oil companies. On April 25 Exxon-Mobil (XOM, news, msgs) became the latest oil giant to evacuate non-essential personal from one of its Nigerian oil terminals.
And finally, in Venezuela, President Hugo Chavez's plans to nationalize oil projects in the Orinoco River basin threaten to further reduce the country's oil production as some global oil companies decide to pull up stakes and invest elsewhere. Venezuela's current production is already 400,000 barrels a day less than it was before a 2002-2003 oil industry strike against the president and his policies.
Contagious fear
At $75 a barrel oil has provided support to natural-gas prices -- even though there is no evidence of a natural-gas supply shortage in the United States now and even though natural-gas inventories, now at 1.761 trillion cubic feet, are an astounding 678 billion cubic feet above the average inventory level for the last five years, according to the U.S. Department of Energy. Bernstein Research calculates that even a hotter than normal summer, which would run down natural-gas supplies as utilities turn on their gas powered generators to meet peak air conditioning loads, would still leave U.S. inventory levels at "full" by autumn.
But natural-gas prices get support from oil prices by a kind of market contagion. Worries about disruption to oil supplies seep over into the natural-gas market and are fed by stories of Russians cutting off gas supplies to Eastern and Western Europe and by fears of another hurricane-blown supply disruption in the Gulf of Mexico. Speculators who have made money betting on worries in the oil market have made analogous bets in the natural- gas market in hopes of just those sorts of supply disruption.
This support from oil has kept natural-gas prices high and encouraged high-cost producers to stay in the market. Cutting into inventories will have to wait until gas companies decide to curtail production. Gas producers won't cut back on expansion plans and reduce production until natural gas prices sink from current levels above $7 to below $5 per million BTUs. At that price point natural gas again becomes competitive with coal at current prices for electricity generation. That would lead to a surge in demand. With cutbacks in production, that would be enough to soak up inventory.
Oil at $75 a barrel does more than keep natural gas at $7-$8 per million BTUs. It drives an active oil and natural-gas replacement market in oil sands and, more importantly, coal.
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