New tensions in the Middle East have buoyed crude prices for the moment, but I don't believe that the latest Israeli/Palestinian dust-up will continue for long, and crude prices will continue their drop into the high $70s. This rally is an opportunity to sell oil stocks that you might want to take profits on going into 2013.
Another round in the endless struggle between the Israelis and Palestinians began with increased missile launches coming from the Gaza strip and Israel retaliating with targeted assassinations and air strikes of military installations. While avoiding the obvious human tragedy associated with new military action from both sides, what has been most telling is the strong increase in coverage from the media, both in the U.S. and Europe. It's not as if these incursions haven't happened before and with much more intense confrontation and destruction. It's sad but true that many who cover the Middle East are now accepting that these violent outbursts are a recurring fact of life, and this is, at least so far, a relatively small one.
That could change with a land incursion of Israeli troops into Gaza, but that is looking far less likely by the day. Egypt's Islamist leadership is a non-factor, without the will or military cooperation to be important. It's likely that there will be an Israeli sortie to destroy missile sites and transport tunnels, followed by another "permanent truce" agreement destined to fail again.
But for the oil markets, this is just a small respite from what has looked like a bear move since mid-September. Consolidation of the first leg of this bear move starting in early October and running the West Texas Intermediate spot price between $84 and $92 seems about done. The next leg down will bring the price under $80 in my view, when we can again seriously look to buy oil and oil stocks.
There are other reasons I dislike oil and stocks here in the short run, but this rally brought on by the latest action in the Mideast is still an opportunity to take profits in the oil companies and oil service sectors that still have some for 2012 going into the late stages of the fourth quarter. One important thought to keep in mind is the fiscal cliff, not only because of its effects on the economy, but largely because any deal of increased revenues will almost certainly increase the 15% capital gains tax. This I can say with 100% certainty: You'll never see a lower rate than you're seeing right now in capital gains.
That's a reason to continue to harvest gains in the big multis that are still showing positive action this year, including Exxon Mobil (XOM), Conoco (COP), Chevron (CVX) and Shell (RDS.A) among others, even if you missed the chance to cash out at the highs earlier in September. And even if you buy back higher in 2013, your tax advantage is secured.
But I don't think you'll need to buy them back higher; I think you'll get them much lower.