You've obviously noticed the relatively pronounced dip in crude oil prices since they hit the stratosphere earlier this summer. If nothing else, it's become somewhat less traumatic to turn into your local gasoline station.
But what hasn't received quite as much attention is the relative imbalance that's occurred between oil and natural gas prices of late. As The Wall Street Journal notes, the average ratio of oil-to-gas market prices has hovered around nine for the past couple of decades. It's now hovering around 15, meaning that, even though they've fallen, oil prices are still lots higher on a relative basis than their gaseous counterparts.
As I think about that discrepancy, I'm pushed to redouble my attention to oilfield services names, including Schlumberger (NYSE: SLB) and Halliburton (NYSE: HAL), and deepwater drillers like Transocean (NYSE: RIG) and Diamond Offshore (NYSE: DO), all of which are getting smacked around by Mr. Market today. They serve companies in both the oil and gas industries.
Here, in a nutshell, is what appears to be going on with natural gas: As the Journal points out, new technology -- and I'd add in a bevy of new plays, as well -- could double our gas production growth rate this year to 8%, versus 4% in 2007. At the same time, with our economy slowing, the growth of U.S. demand could be cut in half, to 3%, in 2008. That's far more important than the slight decline in gas stocks last week that the Energy Information Administration told us about.
Whether crude prices will continue to fall enough to bring the commodities into a semblance of historic balance is anybody's call. My guess is that, given the global spread of crude and the domestic nature of natural gas, they won't.
All of which makes me somewhat queasy about full-scale share price recoveries for "gassy" independents like Devon Energy (NYSE: DVN) and Anadarko Petroleum (NYSE: APC). Indeed, with both oil and gas prices slipping, I also find myself less optimistic about most of the majors, like BP (NYSE: BP).
So why has the oil-gas disparity made me find the service companies more attractive? Simply because they won't become trapped by inter-commodity price discrepancies. Their work will continue -- and their earnings will remain robust -- unless both oil and gas drilling seize up, which is unlikely.
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