1/10/07 Momentum

The drop in the price of crude picked up in early Tuesday morning trading with the low below $54 a barrel. This caused selling by chartists and the bearish sentiment increased. As I looked at my positions, the losses grew, and even though natural gas was holding up, the portfolio took it on the chin. It's not the first time, and I'm patient. [Read more here]

Eric Ross comments:

I'm a bit confused. Why would one trade oil futures/gas futures when one could invest in "oil drilling/gas wells" and pull in a far better return for his buck? Risk/Reward … it makes sense to own an actual "piece" of oil/gas real estate than bet on futures. But what do I know, I'm just surrounding myself with some of the biggest oil/gas families in Texas.

Andrea Ravano adds: 

I cannot understand the logic behind the performance of oil companies such as Total, Exxon, Eni, Conoco and others alike: the market always bids up the stock along with the price of oil. If the companies make money by transforming crude oil into other products, why should their profit grow along with the increase in price of their main raw material? I understand that inventory pricing can make a big difference at $70/barrel vs. $50/barrel, but I'm sure there must be a better explanation for the case. Oil experts, please be patient with my ignorance.  

Stefan Jovanovich comments:

I am not an oil expert but am fortunate enough to know a few who tolerate my persistent ignorance. Their opinion is that the stock market presently values energy companies - including those that do not own oil and gas properties - as proxies for the oil price itself and does not value the companies' profitability at all. Those of us who remain unprofitably long in oil & gas & refining stocks keep hoping that the industry will someday be viewed as an actual business, but we may have to wait a lifetime or two. When Hubbert's Peak theories were first popular (in the late 70s), a friend from New England asked my wife, who was working for Getty at the time, and what she would do for a job when the oil ran out. The notions that petroleum is somehow peripheral to economic activity and that it should and will be replaced easily by an alternative seem to be two adult fairy tales that get told again and again.


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