The Price of Oil: A Real Gusher
October 29th, 2007 by 
CA Editors
Stephen Frankola sends: In overnight electronic trading, oil is now putting up new record highs. As of the most recent quite while I’m writing this, it’s over $93/barrel, up over $1 from its previous high.
(In the short term, this could be good for me… I currently own some ConocoPhillips calls, and on most otherwise-newsless days, the price of oil stocks will track the price of oil).
However, as I published earlier, I admit that there is no merit to these inflated prices. Just this weekend, Barrons published their own articles about how the price of oil is looking quite high. There are some tensions in the Middle East right now, but there’s really no tangible reason for oil to be setting new daily highs.
One of the dumbest price-triggers of the previous week’s run-up was the midweek inventory report that propped up the price 3%. During the previous weeks, the reports had been bearish, as inventories grew. The bulls that spin the media wrote off the reports as unimportant, when considering the big picture.
Then, the first report that shows a decline in inventory sends the price skyrocking. It’s really illogical and dumb.
That’s why I’m trying to milk this bubble for all it is worth. I owned some Conoco puts going into earnings, and about $5 of negative price movement nearly tripled my options. As the stock appeared to be bottoming out (I did a good job predicting the bottom, within about $1) I switched to some calls, as the price of oil is now trending upwards.
So, as I said when oil was $10 cheaper, there’s really no fundamental reason for oil to be this expensive. If you’re an experienced trader/investor, maybe think about playing the swings, like I am. If you’re a long term-oriented investor, I’d suggest getting into one of the oil companies with lower P/Es - like Conoco (COP) - or just sitting on the sidelines for a while. I truly believe that oil is quite overvalued, but there’s no telling if, or when, people will come to their senses.
Barrons recommended avoiding Petrochina (PTR); its P/E is in the 20s, versus about 8-11 for the big American companies. It’s tempting to get into a hot, well-performing Chinese stock, but I’d recommend staying on the sidelines, too.
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November 1st, 2007 at 12:01 am
I’m still sitting tight in my Conoco calls, as oil continues to take out new record highs.
Right now it’s momentum versus fundamentals, and I really have no idea who will win. As oil inches towards $100, speculation is continuing to fuel its ridiculous run.
The rate cut helps the bull keep charging, and news of rationing in China can’t hurt. If oil breaks through $100, then it’ll plow through the all-time inflation-adjusted high $101 and change, i believe), and probably have some room to go after that.
This speculation is outrageous, but I’ll enjoy it as long as I’m profiting from it. I own some Marathon Oil too, which has also done well. But eventually, oil will correct, and I’ll try my best to identify when that will occur.
November 1st, 2007 at 4:20 am
Ok, I need to make sure all is well between the Stock Market and these out of sight oil prices.
I think Supply and Demand is what governs the price of oil and hence the pertinent stocks and further the market on the whole. In reality, the price of oil and the stock market do not in fact have an inverse reaction to one another as you hear on T.V. and everywhere else. I can’t even find a time lag correlation between the two.
One should also think about the fact that the price of those oil stocks includes the concern about the inverse relationship that is suppose to exists between the price of oil and the market.
A chart of oil and the S&P Index merely tells us that they both generally rise overtime and nothing more.
High Oil Prices means what?
We can afford it, otherwise the oil companies lower prices to meet demand, because the invention that replaces oil is around the corner. I truly believe that there is no shortage of oil, but more a shortage of refineries. Further, how can we run out of oil because as the price rises, so will the substitute for it. In my view, $5.00 per gallon should be the last straw and it could be $3.50 per gallon for all I know, but what I do know is this is a free market and what goes up will certainly find its way down.
Therefore, if I was an Oil Stockholder in the present, I would sell, refrain from being to greedy and find out what sector(s) will outperform next, locate an undervalued play and back the truck up.
These oil stocks are great, but a year or few from now, the market will do what it does to every single bubble that arises.
Good Luck, Michael