Are These Big Oil Stocks at a Permanent High?
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Despite slumping demand for oil around the world due to declining economic growth, the stock prices of Big Oil firms such as ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX), Occidental Petroleum (NYSE: OXY), ConocoPhillips (NYSE: COP) and BP PLC (NYSE: BP) could be lodged permanently at high levels due to factors having nothing to do with the fundamentals of supply and demand.
As the chart below reveals, the share prices of these five major oil firms have been rising despite slumping economc growth. A major factor for the rise are the policies of the Federal Reserve. Under Chairman Ben Bernanke, the Federal Reserve has committed itself to a low interest rate policy. This requires the Federal Reserve Bank to purchase Bonds by inflating its balance sheet.
That makes the US Dollar less attractive as an investment and oil more appealing. When the price of oil rises, so does the share price of ExxonMobil, BP PLC, Chevron, ConocoPhillips and Occidental Petroleum as the chart below shows.
The chart below shows the trading relationship between the value of US Dollar assets, such as long term Treasury Bonds, and the price of oil.
Bernanke has articulated a policy that one analyst has deemed "QE Forever." In this, the Federal Reserve will continue to buy bonds to keep interest rates low until the American economy recovers enough. That does not appear to be anytime soon so high oil prices should remain as a result, even though the world's biggest economy will be weak.
The low interest rate environment being perpetuated by Bernanke puts a premium on income assets. Oil companies have robust dividend yields. The average dividend income for shareholders from a member of the Standard & Poor's 500 Index is around 2%. As the chart below evinces, ExxonMobil, Occidental Petrolem, Chevron, ConocoPhillips and BP PLC all have dividend yields that are much higher.
OXY Dividend Yield data by YCharts
Another government policy that will keep oil prices high is the need in Middle East OPEC to finance domestic spending programs to prevent an "Arab Spring" rebellion. In an interview with the Financial Times earlier this year, Saudi oil Mininister, Ali Naimi, stated that the target price was $100 a barrel. High quality global journalism requires investment. “Our wish and hope is we can stabilize this oil price and keep it at a level around $100 [a barrel]. If we were able as producers and consumers to average $100 I think the world economy would be in better shape.” About this, Carsten Fristch, an oil analyst with Commerzbank, observed that, “The Saudis need to spend more money to keep their citizens quiet and prevent protests."
In testimony before the United States Congress, Rex Tillerson, Chief Executive Officer of Exxon-Mobil, stated that based on economic demand, the price of oil should be around $60-70 a barrel. The rest of the cost results from speculators driving up the price of crude due to the weakness in the United States Dollar and other fiat currencies. Based on the policies of Federal Reserve Chairman Ben Bernanke that will result in a weak United States Dollar and low interest combined with the need by Saudia Arabia and other Middle OPEC nations for $100 a barrel, the share prices of major oil companies could stay at a high level even if global demand for oil has declined
Fool blogger Jonathan Yates does not own any of the stocks mentioned in this article. The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services recommend Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
