Oil Price 1 Oil Shares 0

US oil prices, as represented by West Texas Intermediate (WTI), the US benchmark for crude oil, briefly hit US$100 per barrel overnight, before slipping a bit lower.

In the past 10 days or so, oil has jumped by around US$15 a barrel. That’s a decent rally. Brent Crude, which is the European and African benchmark, is much higher, trading over US$110 per barrel.

Obviously Mr Gaddafi (he’s no colonel) is having an impact there.

Importantly for Australia, the Tapis oil price, which is the Asian Benchmark, is trading around US$110 a barrel.

The question we want to ponder today though, is why aren’t Aussie oil and gas stocks responding to the sharp move higher?

Could it be that too many investors got burnt in the last oil price bubble in 2008 and don’t want to jump on the bandwagon again? Maybe.

Check out the chart below. It shows the share price performance of Woodside Petroleum (WPL), Australia’s largest energy company.

If you cast you mind back a few years, you’ll remember the WTI oil price first breached US$100 dollars in early 2008. This pushed Woodside’s share price up over the $55 mark. Now, at the same price, Woodside can barely keep its head above $40 a share.

The oil price then went vertical and by mid-2008 oil was trading briefly around US$150 a barrel.

Despite predictions of US$200 a barrel, the global economy tanked and brought the oil price down with it. Oil stocks, as you can see in the Woodside chart, plunged.

Hindsight analysis concluded that oil played a big part in bringing the global economy down. Sure, the sub-prime debacle was a major factor…but oil prices gave it a good shove over the edge.

So now, with oil back in the headlines, and analysts competing to come up with the highest forecast (Nomura in the lead at the moment with a US$220 a barrel guess) stock prices are doing very little.

Could it be that investors have learned their lesson from 2008? We’re not convinced that investors have learned any lessons from the 2008 crash.

Our best guess is that the market views geo-politically driven oil price increases very differently to ones driven by easy credit. Easy-credit fuelled rallies masquerade as a sign of strong demand…until they don’t.

It seems that markets now think that higher oil prices will sow the seeds of its demise. That is, higher oil prices will lead to lower oil prices, at some point.

That’s assuming Saudi Arabia doesn’t catch on fire, which is a very big risk.  The FT reports that Saudi King Abdullah is offering up to US$36bn in bribes to get the population to cool it.

‘The measures include a 15 per cent salary rise for public employees to offset inflation, reprieves for imprisoned debtors, and financial aid for students and the unemployed.’

If that’s not a recipe for future inflation, I don’t know what is. Inflation is just another word for debasing the currency.

It was Keynes who said: ‘There is no subtler, or surer means of overturning the existing basis of society than to debase the currency.’

Unwittingly, it looks like King Abdullah is sowing the seeds of his own demise.

But right now, Aussie oil and gas shares are not factoring in a blow-up in Saudi Arabia.

One other possible reason for this comes down to good old-fashioned valuation. In the latest issue of Sound Money. Sound Investments we analysed the largest energy companies in Australia.

Without giving too much away, we concluded there wasn’t too much to get excited about. These companies are investing billions in projects that won’t be profitable for years.

What will oil and gas prices be – and therefore what will a company’s return on investment be – in 2014 and 2015? We have no idea. Buying now though suggests that you do.

One thing is for sure, the market doesn’t like higher oil prices. Reality has sunk in this week as global equity markets undergo a long overdue correction.

And that’s the question, is this just a correction, or the start of something more ominous.

Since we’re down here at DR headquarters in St Kilda today, we asked Murray Dawes, our resident trader and technical guru, what he thought of the recent price action of the ASX200.

Here’s what he had to say:

4815 (the upper horizontal blue line on the chart) was the previous high of the range for the past six months, reached on the 5th of November last year.  A failure under that level hints that we may be returning to the previous range having had a false break of it in the past month.  The 35-day moving average (the red line) is around 4800, an important support level.

We remain in intermediate uptrend while the 10-day MA (the blue line) is above the 35 day MA so I would still expect to see buying support coming in at key levels.  Therefore I would expect to see good support around this level, with a close back above the 10-day MA actually sending a buy signal.

I will turn more bearish when the 10-day MA closes below the 35 day MA.  If the Irish elections have their expected outcome and the banks are told to go and shove it from the new PM then I wouldn’t be surprised to see this weakness turn into something more substantial over the next few weeks.

Thanks Murray!

Yes, the Irish elections. They’re slated for the 25 May. If Ireland does an Iceland and tells the dumb banks who made dumb loans that they are not going to pay them back at 100 cents on the dollar, then the markets’ focus will shift back to Europe next week.

Things could get interesting…

Greg Canavan
For Markets and Money

Greg Canavan
Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

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3 Comments on "Oil Price 1 Oil Shares 0"

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Quote on Saudi Arabia: ‘The measures include a 15 per cent salary rise for public employees to offset inflation, reprieves for imprisoned debtors, and financial aid for students and the unemployed.’

Arent increasing salaries the best way to stimulate inflation…..

It seems the influence of the U.S in tin-pot dictatorships is diminishing along with the real value of their dollar. If no one wants a dollar, it is harder to buy compliance. Plus they are over-extended militarily so the middle east can rise up without fear of intervention. Remembering that the only reason these dictatorships exist is due to U.S backing but more specifically military intervention from the British S.A.S since before Suez. (see also Aussie, NZ S.A.S). If you look at their military operations since the 50s you can check them off against the current dictatorships. But what is… Read more »

“One thing is for sure, the market doesn’t like higher oil prices.”
I’m paying twenty cents more now than about a month or two ago. For diesel.
I don’t like it.
Looking at gold, silver and Murrays chart above there’s a bit of breakout re-testing to do or testing of recent highs (gold) but if that’s successful we’ll be going higher again. It’s getting scary. The zombies are out.

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