OIL, OIL, OIL

The extreme disconnect between oil supplies and oil prices is potentially very good news and very bad news. The closing of the US embassy in Saudi Arabia today highlights that the disconnect may be based on heightened risk of oil supply disruptions due to terrorism.

Oil inventories bottomed January of 2004. Since then, US inventories have increased by close to 60,000,000 barrels not counting the millions that went into into the strategic reserve. The reserve will be topped off this month. Prices are set on the margin and it will soon be true that there is no place to hoard any more oil. Of course the growth in demand in India and China will not change because the US reserve is filled. India and China are using less and less oil per unit of manufactured goods but they are making a lot of goods.

The risk for investors is in getting caught in the earnings glory. Yes, earnings are going to be high, but how much of the earnings are already in the stocks? P/E ratios of the major integrated oils are quite low but for the good reason that earnings may be on an all time and temporary peak.

If Iraq passes a constitution this month and US troops begin to be drawn down by next year, will Iraqi production increase? Will coal continue to take market share in the production of electricity? Will Mexico invite international oil companies to reinvigorate their stagnant fields? Will Canadian tar sands become the new Saudi Arabia?

Folks always worry if one suggests that "this time is different". Of course each time is different. When the oil crisis hit in the 70's, the majority of cars were gas guzzlers. This time, a lot of SUV's are being parked because there are alternative vehicles available. I saw a couple of new models yesterday that were clearly designed with fuel savings in mind. As always, it takes awhile to adjust but one should remember that the market looks forward. If the energy bill and other changes are going to effect supply and demand three years down the road, stock market prices will gradually discount the changes.

Current psychology is such that the first dip in oil stocks will be bought heavily by many who already own large positions. The ouch on the way down could be a very loud ouch.

Clearly the oil market is afraid of supply disruption or it has been overcome by speculation. Investors should look for the next "bubble" as it is risky to invest in oil drillers based on today's prices. Should the price drop back to the 50's, the oil stocks would take a hit.

Speaking of hits, some of the housing stocks are taking a tumble. Is smart money starting to leave the housing stocks? The rotation seems to be out of housing and into high tech.

BUY THE BULL! MSFT IS EVEN MOVING UP! MSFT HAS DOUBLED ITS EARNINGS IN THE PAST 5 YEARS BUT THE STOCK HAS BEEN STUCK. THE SECOND LEG OF THE TECH BOOM SHOULD BE BIG!