Big Oil's Next Bull Run

Just before Christmas Eve 2008, oil prices fell to their lowest level in four-and-a-half years -- $33.87 per barrel of NYMEX Light Sweet Crude.

Bad Santa
So forgive petro-investors if they're looking a bit glum these days. Even after Santa's conciliatory post-holiday boost in oil prices, the fact remains that when Christmas arrived, all these guys and gals got was (if you'll forgive the inexorable mixed hydrocarbon metaphor) a lump of coal.

Now, it's worth pointing out at this point that, as far as prices have fallen, we're still a ways away from the lowest price in recent memory -- $10.72, a nadir hit on Dec. 10, 1998, or $13.97 in today-dollars.

Today, oil trades for $42.63. In other words, for it to regain the crest of its recent super-spike -- $145.29, reached on Independence Day Eve 2008 -- it must more than triple in price. To revisit its lows of the decade, it must fall only 60%. And so I submit to you that ...

We're closer to the bottom than the top
Now, I'm not necessarily saying we'll see $145 oil, but at least based on these historical prices there's about 70% downside versus 240% upside. On the face of it, that makes for an interesting proposition, yes? For those of us who missed Big Oil's last bull run, now looks like a pretty propitious moment to jump in and catch the rebound.

So let's take a moment to consider a few options for how we might accomplish that:

 

Price on Dec. 5, 2003

Recent Price

Return

Petroleo Brasileiro 

(NYSE: PBR  )

$5.60

$27.08

394%

ExxonMobil 

(NYSE: XOM  )

$36.31

$79.09

137%

Chevron

(NYSE: CVX  )

$33.46

$74.24

122%

Transocean (NYSE: RIG  )

$21.75

$56.63

160%

Halliburton  (NYSE: HAL  )

$11.54

$21.16

83%

Data courtesy of Yahoo! Finance. Stock prices adjusted for splits and dividends.

As it turns out, oil stocks haven't been hit as hard as oil prices. To the contrary, despite oil barrels selling for little more than they fetched five years ago, oil stocks are sitting on sizable gains. Why might that be?

Super-spike me!
I suspect that investors' memories are still fixated on that super-spike price of six months ago. Years of watching oil go nowhere but up conditioned us all to believe that this was the normal, usual, natural state of affairs. All the evidence seemed to point this way, right? After all:

  • We're not making any more dinosaurs, hence no new oil.
  • The cheapest oil has already been extracted. What's left is going to cost us.
  • Remember China and India? They're becoming richer than ever before and signing up for driver's ed.
  • Two-thirds of petroleum in the U.S. is used in transportation, so even if green energy companies like Suntech (NYSE: STP  ) and SunPower (Nasdaq: SPWRA  ) achieve grid parity, that won't have too meaningful an impact on oil prices in the absence of plug-in hybrid use.

As so oil bulls say that oil prices naturally want to gush, and today's downturn is just a temporary loss of pressure -- easily fixed. Problem is, with the global economy in recession, and oil demand dropping like a stone, it may take longer than people think for revenues to resume pumping.

Manage your expectations
But here's the thing: By the time oil is finally ready to rebound, people's recent experience may well have shifted once again. The longer oil stays down, the more people will expect this new trend to continue, and undervalue oil companies accordingly. That's just the way the human brain works -- we tend to take the recent past, and project it into the future. Fortunately, clever Fools can take this built-in psychological glitch and turn it into an opportunity for profit. Here's how.

Fools must:

  • Recognize that when the reversal comes, it will surprise all of us. No one can time the market, so spread your investments out over time.
  • When you do invest, demand a margin of safety, and make sure to buy with a 3-to-5-year time horizon. This process will take time to play out.
  • Meanwhile, make sure your stock pays you to be patient, in the form of regular, robust dividends.

Ready to get started? Then sign up today for a free trial of Motley Fool Income Investor, where we have eight active energy recommendations that we think will profit from this opportunity.

Fool contributor Rich Smith does not own shares of any company named above. Petroleo Brasileiro is a Motley Fool Income Investor recommendation. Suntech Power is a Motley Fool Rule Breakers selection. The Motley Fool's disclosure policy has been collecting dividends for 15 years, and is saving up to buy a Prius.


Read/Post Comments (3) | Recommend This Article (36)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 09, 2009, at 5:46 PM, EnigmaDude wrote:

    pretty propitious moment - nice!

  • Report this Comment On January 09, 2009, at 6:00 PM, Otrex wrote:

    I have to agree here. The general trend for oil in 2009 is up.

  • Report this Comment On January 11, 2009, at 10:15 PM, regular87 wrote:

    If they are providers or wholesale or retail gasoline the ride down is a much more profitable ride than the ride up! Retail margins are far greater as prices fall, this is a result of slower price adjustment and greed from local competition. Wholesale providers that are hedged against the NYMEX will also capture added value during a bearish market...

    http://www.regular87.com

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