Thursday, September 29, 2005


Chart of the week has posted (subscription required) a neat chart showing the historical performance of oil stocks. This chart is consistent with my posting in regard to oil demand. The peak demand for oil is during the summer months. The obvious reason is that most of the oil we consume is for transportation and we drive much more during the summer vacation season. This chart below from the Energy Information Administration focuses on this fact

Should one plot the historical performance of the stock market, the last quarter is the strongest quarter of the year. Wow! The strongest quarter is the weakest quarter for oil stocks.

As I wrote the other day, the Rydex allocations show aggressive investors have dramatically over-weighted oil stocks. This information is good information for the contrarian investment approach that I use. In other words, if the crowd has piled into one area, I go the other way.

CAL is a hated stock in a hated group. However, this well run airline will make 30 cents per share next year for each $1 drop in the price of oil. Now, if you believe the price of jet fuel is going to stay at the currently artificially high rates as caused by the hurricanes, then you should avoid this stock. On the other hand, if you believe oil prices will decline to the mid 50's as I do, then this company is likely to make $3 per share next year; making for a lot of upside.

It is interesting to note that Saudi Arabia has excess heavy crude oil available right now. At the same time, Libyan production of sweet oil is expanding fire the first time in 20 years. Who wants to build an expensive refinery to process heavy crude when Libya and Iraq may be sending 5 more million barrels of sweet oil to the market?

Right now, the gap between perception and reality is very large. Futures markets bet that oil is near the peak. The public is down and out as is shown in various surveys of consumer sentiment. However, businesses are sitting on piles of cash. Companies are optimistic. They are ready to buy back stock, raise dividends or buy other companies. The pace of merger and acquisitions remains strong. This morning, it was announced that Etrade will buy Brownco from JPM. The price; 1.6 Billion.