Chances are, unless you live in Colorado -- which has become noteworthy for bucking the nation's current warm-winter trend -- you spent much of the past weekend in shirtsleeves. In New Jersey, for instance, which we in Florida tend to think of this time of year as the icy north, residents basked in 70-degree January temperatures on Saturday. Boston wasn't far behind, with a balmy level above 65 degrees. Even my own state has been recording temperatures well in excess of the norms that annually lure all manner of winter visitors from places like New Jersey and Boston.
What's going on here? Why the odd climactic situation, and what does it mean for things such as crude-oil prices and, perhaps more importantly for Fools, energy investments? I'm incapable of invoking arcane meteorological explanations for the phenomenon. It does appear, however, that El Nino, the cyclical warming trend in the Pacific, appears to be somewhat responsible for the elevated readings, as does a jet stream that is farther north than usual, and thereby is blocking donations of frigid air from our Canadian friends.
But whatever its causes, the warmer-than-normal winter has indeed had a profound effect on crude-oil prices. In concert with the relatively high inventories of gasoline, heating oil, and diesel fuel reported last week by the Energy Information Administration, the abnormal weather dropped crude prices precipitously during the week, even allowing for Friday's $0.72-per-barrel recovery. The upturn followed drops of nearly $3 each on Wednesday and Thursday, such that light, sweet crude is now hovering near $55 on the New York Mercantile Exchange. That figure compares with a level more than $8 higher a month ago.
All of this has predictably influenced the share prices of the energy companies, which collectively constitute the largest sector in the Standard & Poor's 500 index. In the five trading days that ended on Friday, the industry's stalwarts -- both producers and the service companies -- did not fare well. The sector's major domo, ExxonMobil (NYSE:XOM) dropped approximately 5.3% during the period, while Chevron (NYSE:CVX) shed 4.9%, and BP (NYSE:BP) slid 3.2%. On the service side, the damage was even more severe: Baker Hughes (NYSE:BHI), down 9.8%, Oceaneering (NYSE:OII), down 8.5%, and offshore driller Transocean (NYSE:RIG), down 6.4%.
So should Fools now buy, sell, or waffle relative to the energy names? My feeling is that weather is a short-term phenomenon that changes daily, if not more frequently, and since the inventory numbers are released weekly, this week's set could be as bullish as last week's was bearish. Of considerably more importance for Fools with at least normal investment time horizons is the tightness in the world's crude-oil supply/demand balance and the need to add substantially to worldwide productive capacity for at least several decades to come.
In this context, the industry's share-price declines of the past week can easily be viewed as constituting a buying opportunity. For my money, that's how I'm inclined to treat them. In the process, I'll be renewing my analysis of the names mentioned above, all of which include substantial international exposure and a bias toward oil.
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Fool contributor David Lee Smith does not own shares in any of the companies mentioned. He welcomes your questions and comments.
