Oil's Barometers
Brian Trumbore
President/Editor, StocksandNews.com

Just like the S&P 500 is the chief broad indicator for the stock market (the Dow Jones Industrial Average gets the headlines, but non-sector specific money managers are graded vs. the S&P), for energy stocks the two chief benchmarks are the OSX and XOI.

The OSX is comprised of oil service companies and drillers, among which are operators such as Baker Hughes, Nabors, GlobalSantaFe, and Schlumberger.

The XOI is comprised of the major integrateds, including the likes of BP, Chevron, ConocoPhillips and Exxon Mobil.

So I thought we'd take a look at the price action in these two the past 24 months as crude oil rocketed from $43 to $78 and back to $60.

As you can see below, the OSX basically doubled in 16+ months as the price of crude was rising 80 percent ($43 to $78), while the XOI rose about 70 percent over a slightly longer time period.

Both have been volatile, with rallies and corrections of 10 to 15 percent often occurring in a matter of days and weeks. The moves have been exacerbated by 'hot money,' hedge funds, that have traded the energy sector as part of the overall boom in commodities; one fueled by increasing demand from China and India beyond what was expected just a few years earlier.

Geopolitical concerns have also been a key factor, particularly Iran. It was a perceived lessening of tensions over Iran, for example, that helped lead to the mini-collapse in oil prices from $78 to below $60. Of course as I've argued in my "Week in Review" column, the issue of Iran is really just as hot as ever, even if traders don't recognize it as such these days.

Fundamentals, however, have also played a role in the recent declines in the commodity (including gasoline futures and natural gas). Inventories are more than substantial and have been for years.

But why have energy stocks, as represented by the OSX and XOI, rallied back so hard following the index lows of Oct. 3, while the price of crude has been essentially unchanged and mired below the $60 level?

Again, part of it is the hot money drying up (at least for now), including on the 'short' side, and thus those left are focusing more on profit fundamentals which remain strong.

But as always there remain concerns, such as a new Democratic majority in Congress attempting to take away Big Oil's incentives to drill. I'll comment as needed on that topic in the "Week in Review," as well as my running commentary on the hot spots, the vast majority of which these days have an oil angle.

Lastly there's the weather, which can impact oil prices both on the upside (such as was the case with Hurricanes Katrina and Rita), as well as the downside in terms of above normal temperatures. But only Mother Nature can comment on these matters and she's a tough one to track down.

OSX

12/31/04?123 (index level) ($43.45?oil price)
3/31/05?..139 ($55.41)
6/30/05?..146 ($56.50)
9/30/05?..175 ($66.24)
12/31/05?182 ($61.04)
3/31/06?..208 ($66.32)
5/10/06?..235 ($72.14)
6/30/06?..210 ($73.95)
7/14/06?..208 ($77.03, $78 intraday peak)
9/30/06?..186 ($62.91)
10/03/06?173 ($58.69)
11/15/06?201 ($58.76)

Notes: 5/10/06 closing high?intraday high established at 238 on 5/11. 10/3/06 cycle low.

XOI

12/31/04?721 ($43.45)
3/31/05?.852 ($55.41)
6/30/05?.888 ($56.50)
9/30/05?1076 ($66.24)
12/31/05?986 ($61.04)
3/31/06?1070 ($66.32)
6/30/06?1153 ($73.95)
7/14/06?1177 ($77.03, $78 intraday peak)
8/9/06?..1219 ($76.36)
9/30/06?1083 ($62.91)
10/3/06?1035 ($58.69)
11/15/06..1177 ($58.76)

Notes: 8/9/06 closing high?intraday high established at 1232, also on 8/9. 10/3/06 cycle low.

Sources:

Yahoo Finance, Union Pacific Railroad (uprr.com),
StocksandNews.com database

Wall Street History will return in two weeks. Happy Thanksgiving.

Brian Trumbore

BUYandHOLD does not offer or provide any investment advice or opinion regarding the nature, potential, value, suitability or profitability of any particular security, portfolio of securities, transaction or investment strategy. The securities mentioned above are being used for illustrative and informational purposes only and should not be regarded as an offer to sell or as a solicitation of an offer to buy.