Wall St.’s Gusher in Energy Stocks Not Tapped Out
The recent spurt in crude oil prices has turned energy stocks and natural resources mutual funds into some of the best performers so far this year.
But can they hold their gains?
Although oil prices have slid back a bit, taking many energy stocks down as well in recent sessions, the gusher on Wall Street isn’t tapped out yet, many industry analysts say.
The oil rally may take off the summer but could regain its momentum in the fall as cool weather arrives and recovering Asian economies gather more strength, experts say.
Crude oil prices and energy stocks “are taking a much-needed rest,” said Fadel Gheit, senior energy analyst at investment firm Fahnestock & Co. in New York. “There’s really a lack of excitement right now.”
The oil industry endured excessive excitement in the last 18 months, first because of a precipitous price plunge in 1998 that sent oil and gasoline prices to 12-year lows by December.
Then in March, the Organization of Petroleum Exporting Countries agreed to a third round of oil production cuts, which ignited a price rally. West Texas intermediate crude, the U.S. benchmark that flirted with $10 a barrel in December, topped $18 a barrel in April and has bobbled between $17 and $18 a barrel since then.
Crude oil futures for July delivery fell 9 cents Tuesday to $17.61 a barrel on the last trading day for that contract on the New York Mercantile Exchange.
Traders have been concerned about rising U.S. gasoline inventories in recent weeks. But after trading ended Tuesday, the American Petroleum Institute reported that gas inventories were little changed last week, while demand remained at a five-week high.
More surprising was that crude oil inventories fell 5.75 million barrels to 331.3 million barrels, 7.2 million barrels lower than a year ago.
Investors have been betting that OPEC cuts and rising demand will boost energy companies’ earnings. Better prices, along with ongoing industry mergers, have sparked a big rally in the stocks this year.
The Chicago Board Options Exchange index of 14 major oil stocks has jumped 19% year to date, while the Standard & Poor’s 500-stock index is up 9.7%, including dividends.
Natural resources mutual funds, driven largely by energy stocks, were up nearly 29% this year, on average, through last week--the best of all U.S. fund categories.
Energy shares will spend the next few weeks trading mostly sideways while investors digest warnings from some companies about lackluster second-quarter earnings brought about by still-poor refining margins, said Steven A. Pfeifer, oil industry analyst at Prudential Securities.
Even so, “We think they’re about half way through a rally that will continue to the end of the year,” he said.
He is advising clients to use any pullbacks to add to their oil holdings because he believes the group will outperform the market in the third and fourth quarters.
“There has been a fundamental shift in the supply-demand balance” because of sharp reductions in capital spending by oil companies, Pfeifer said. “For the first time in 40 years, we’re seeing non-OPEC production decline.”
Gheit said he is looking to demand improvements in the fall, when natural gas prices should increase with colder weather. Demand from Asian economies also should strengthen, he said.
“OPEC did the best it could,” Gheit said. “Demand has to do its share now. The question is when.”
In the meantime, “I equate this to a midweek, one-day sale at Macy’s,” Gheit said. “If it’s something you really want to buy and you were going to pay full price anyway, then you should buy it because you will get it 10% cheaper.”
But some oil analysts worry that higher prices could push OPEC members to cheat on their quota limits later this year, which could put new downward pressure on prices.
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Fund Sector Leaders, Laggards
Stock mutual funds that invest in natural resources shares--largely energy-related stocks--are performing best of any U.S. fund category so far this year, according to Lipper Inc. Average performance of specialty fund sectors over three time periods:
Total returns, through June 17:
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Fund sector YTD 13 wks. 1 year Natural resources +28.5% +21.2% +5.8% Technology +25.9 +9.7 +70.3 Telecommunications +24.1 +8.3 +50.8 Utilities +7.8 +8.0 +18.9 Real estate +7.4 +13.3 -3.2 Financial services +5.2 +0.3 +3.2 Health-care -4.2 -5.0 +6.1 Avg. general U.S. fund +7.9% +6.2% +13.7% S&P; 500 index +9.7% +2.1% +22.8%
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Source: Lipper Inc.
