Twenty Dollars of Air

I've been exchanging comments the last couple of days with Geoff on the question of whether oil company shares have had their run, and are headed down. With the top-line question being: Is it time to sell one's shares in the oil majors?

Geoff kindly led me to an AP story that Forbes posted yesterday. The piece quotes Fadel Gheit, the sober-thinking Oppenheimer analyst.

First, Gheit thinks that traders have driven up prices to their current levels exceeding $90 a barrel. He notes that Wall Street's consensus 2008 forecast average is $75 a barrel.

Which means that, if the estimate is roughly correct, there's currently a bubble of around $20 barrel. Gheit asserts that commodities traders have exaggerated the global supply situation, which is right -- in fact there's plenty of oil sloshing around the world right now.

All bubbles eventually pop. Prices could go a bit over $100 a barrel, but eventually they'll fall as speculators find some other place to put their money.

Here's the key quote: "Declining oil prices dim the outlook for energy stocks, since their performance usually reflects the direction, not the level, of oil prices," Gheit says.

I don't intend to play stock analyst, but simply to note this logical extension of the conclusion that Big Oil is in trouble because its reserves of oil and natural gas are shrinking. The companies to profit from this shift away from Big Oil are national oil companies and oil service companies; they are the growth energy stocks of the next decade or two.

Photo: Lasse Havelund
Rights: Creative Commons