I have been a long time oil bull. One of the major integrated oil companies has been a long time fixture in my investment portfolio. I also own a commodities fund which owns many oil and metal stocks. I even bought a few shares of Halliburton when they are trading back in the $20 to $30 range. Despite all of this, I think that crude oil has gotten ahead of itself. Here are my reasons.
A simple look at oil supplies and the level of demand globally reveals that crude oil should not be priced at over $100 a barrel. Oil closed at $112 a barrel and regular gasoline is averaging $3.84 per gallon. The fundamentals are not there to support the higher prices. Saudi Arabia recently dropped its oil production stating that demand is simply not there. The country’s officials thought that more oil would be needed because of supply disruptions in Libya. That turned out not to be the case.
The reason for the rise in oil prices is pure speculation. Even OPEC has stated that speculators are adding to the escalating price of crude oil. They believe that speculation could be adding as much as $20 to the price of crude oil.
Big dividend yields are enticing to me and a sign of when oil stocks are cheap. Total and Conoco Phillips are still good dividend stocks but the sector has less and less dividend plays. For example, I was very bullish on Exxon when the yield was over 3%. Now with a yield barely over 2%, I wouldn’t be rushing out to buy the stock. The majority of stocks in the sector are no longer cheap and many are pricing in $100 oil as an ongoing reality.
The value is not there for many stocks in the sector. Even oil service companies like Halliburton are no longer the great value plays that they once were. Now is not the time to start new positions in most of the oil companies.
Other Investment Areas
I am still bullish on commodities but I prefer to look at copper, silver, and agricultural products that have been pulling back lately. As I mentioned on Wednesday, I like companies like Freeport McMoran because the fundamentals favor higher copper prices over the long term. The 14% pullback in prices looks like a good opportunity in the sector. Silver prices have declined 11% and there is still room for growth as demand is solid as well.
Investors do not have to rush out and sell their oil shares but they need to pay close attention to the market. Commodities are a cyclical sector that should be sold when prices are high and bought back into when prices are low.