Sizing Up the New Oil Spike


"Analysts are divided about the reasons for rising prices. . .In any event, oil companies should clean up."

So much for the oil bust. It seems like only yesterday that oil had sunk to $30 a barrel. But with the temperatures heating up and the summer driving season upon is, crude is on the rise: Oil snapped back to over $65 in late May.

What's going on here?

Some point to the decline in oil inventories, which Energy Dept. data showed dropped 5.4 million barrels in its weekly report released May 27. The decline in supply, however, was met with another large drop in demand, which fell 5.4% in March, according to the most recent Petroleum Supply Monthly report released by the Energy Information Administration.

Others mention the forward-looking nature of the markets. "Oil is looking ahead," says T. Rowe Price oil analyst Tim Parker. "When it was at [below] $40, it was looking to how bad 2009 would be," he notes, and the economy thus far in 2009 has proven to be "awful." Now, oil may be looking ahead and seeing better times.

Then there's the falling dollar. When the greenback is weak, oil prices tend to rise. After rising 15% against the euro at the height of the financial crisis, the dollar is now back around 1.40. That can't help but push the oil prices higher.

TD Bank Financial Group economist Dana Carver sees price volatility ahead. "We suspect that the tug-of-war between the weak fundamental picture and a further depreciation in the greenback will persist over the next few quarters," she says. Barclays, on the other hand, sees oil going to $75 soon. "When the market as a whole starts to believe that $75 is pretty much inevitable, then it might as well go straight to it," Barclays' analysts wrote in a report on May 29.

The rise in oil prices is good news for stocks of energy-related companies. Start with the oil services stocks. "Once the price gets up, the first industry to go to work will be the companies that provide services to the oil industry," says Don Hodges, portfolio manager of the Hodges Fund. Citigroup recently raised its price targets for oil services stocks.

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