The U.S. government is making a bullish market-timing call on crude oil, and stepping up to the plate to buy, at what appears to be attractive prices – at least in the eyes of value investor George W. Bush!
Last week President Busch announced plans for the Department of Energy to double the size of the nation’s strategic petroleum reserve – albeit incrementally over the next two-decades. But it was enough to trigger fresh concerns about the tightness of global crude oil supplies. And the news put an immediate bid under oil prices in commodity trading, triggering the biggest single day run-up in crude prices since Hurricane Katrina roiled energy markets in 2005.
Within the next two months Uncle Sam will begin siphoning 100,000 barrels per day off global oil markets, to expand America’s emergency stockpiles, which according to one analyst could add “significant upward pressure on oil prices”. The timing of the move is interesting since crude oil prices have been in a freefall of late – down more than 30% since peaking last July just north of $77 per barrel. In fact, crude prices had swooned more than 15% this year alone prior to last week.
Of course declining crude oil and lower prices at the pump, are seen as a net positive by consumers and businesses around the world (with the exception of oil exporting nations of course), lowering the “energy tax” we have all been paying in escalating increments over the last several years. Additionally, lower oil quotes should help reduce fears of accelerating inflation, a reason sighted as a convenient pretext for global central banks to raise interest rates. But the speed with which crude oil has declined from recent highs also suggests to many economists that global growth is perhaps slowing more rapidly than desired.
There are two-sides to every coin, although consumers and businesses may generally welcome lower energy costs, there’s also a potential downside to lower crude prices.
One of the most attractive factors favoring U.S. stocks is relatively modest current valuation, coupled with stellar corporate profit growth in recent years. S&P 500 profits are expected to climb nearly 15% year over year for all of 2006, once all the fourth-quarter results are tallied over the next few weeks.
And the oil stocks are a big reason for such robust gains. Energy sector profits are expected to surge nearly 26% higher in 2006 compared to 2005, the biggest gain for any of the ten S&P market sectors.
But this year, the rate of S&P 500 profit growth is finally expected to return to a more terrestrial trajectory, with earnings forecast to grow a milder (but still above trend) 9.5% in 2007. Once again, the energy sector is expected to be a big culprit in this projected earnings slowdown, with profit growth in the oil patch expected to decelerate to just 6.2% year over year – a very sharp slowdown from nearly 26% last year.
So lower crude oil prices, while providing some economic releif to businesses and individuals, might also contribute to worries about corporate profits in the U.S. and elsewhere, a factor which could lead to greater volatility in global financial markets during 2007.
Still, amid signs of firming economic growth, and with global crude oil capacity still tight enough to allow little margin for error, the stock market doesn’t seem worried about current oil prices. Since its July 14, 2006 peak, crude oil has fallen about 30%; but the 33 stocks that make up the S&P 500 Energy Sector index have actually gained 3.4%. That’s a strong signal of stable-to-higher oil prices ahead.
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