A Commodity-Minded View of Oil Stocks

 | Feb 08, 2013 | 8:30 AM EST  | Comments
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As a 25-year vet of the oil markets, I see things that most oil analysts don't, even though some of them are not so hard to spot. So when I make recommendations in the energy space, it is through a different prism than that of most of the Wall Street crew, with the underlying commodity foremost in mind.

I can't put you in my head or give you the benefit of my 25 years in the game through columns, but I can show you a few of the many extra factors that I look at that others don't and make you more capable of making your own decisions on what to buy in the energy sector. What I'm always trying hard to do here at Real Money is to get you away from the "crowd think" on stock-picking and get you a unique perspective that will hopefully make you money.

Here's a perspective on the crude market that no one is talking about (save for me): the financial disconnect in the oil market that is driving prices.

Oil is priced physically at many points on the globe, and each price point is different, the way the same house would be priced differently depending on where you were. But oil is also tied financially to the benchmark prices funneled through the exchanges that handle forwards and futures, and those prices are what really set the physical prices around the globe.

This can be a blessing or a curse, but for the oil producers it is a blessing this year: Global oil production is up about 800 million barrels a day in 2012, and demand is up perhaps 200 million to 250 million barrels less than that. That would imply an increasing surplus and why you've seen many oil analysts predict lower prices this year -- the Bank of America analyst even suggested $50 a barrel as possible for 2013.

It won't happen.

Two things are feeding into the financial price point for Brent oil traded at the IntercontinentalExchange (ICE) that just won't allow it to happen. First, while the global supply/demand picture might look bearish, the fundamental picture in the North Sea, where Brent prices come from, is anything but. A continual depleting North Sea production profile continues to create constant supply squeezes every several months, helping to keep prices continually firm. In addition, the correlations between asset classes caused by "financialization" of oil (as I describe in detail in my book) puts upward pressure on prices as the melt-up in the equity markets continues.

And the fact is, no matter what's happening throughout the rest of the oil markets worldwide, the shape of global pricing relies almost exclusively on how crude is being priced in the Brent marketplace.

This is one of the primary reasons I believed that energy (and particularly crude oil production) would be a far better place to be invested in 2013 compared with 2012 and, considering the underperformance of the exploration-and-production sector within energy in 2012, why I felt that solid production and volume growth would translate into incredible outperformance this year.

This has already played itself out positively in the case of Noble Energy (NBL) for example, which I recommended in December at $97. Noble crushed its quarterly report this morning with a $0.63 beat and record sales and cash flow.

It was the outsized crude margins that helped it the most, created by the commodity disconnect I've just described. Sometimes that commodity perspective can be useful ... and profitable.

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