The Oil Stock Swing

We hope you took our energy expert Byron King’s words regarding oil stocks to heart yesterday.

At the very moment he declared that oil and oil service stocks were “way oversold,” a huge rally was getting under way. Folks who panicked and dumped their positions on Tuesday after BP conceded the “top kill” effort in the Gulf of Mexico had failed? They missed out big-time yesterday.

Oil Stocks Rally

Consider the case of the OSX – the Philadelphia Oil Service Index, comprising 15 companies, three of them tied directly to the spill. After an end-of-the-world 7.5% plunge on Tuesday, the OSX rallied 5.5% yesterday. Within some of the index’s components, the market action bordered on the absurd.

Halliburton (NYSE:HAL), for instance, issued a statement that said, to heck with Obama and his six-month ban on deep-water drilling. We’ll just move our people and equipment to other places where they’ll be welcome.

Of course, anyone who casually follows the sector already knows Halliburton has no shortage of business. But the statement was enough to pump up HAL stock 12% in a day.

Such is life when the overall market exhibits signs of the bipolar disorder we diagnosed last week. Yes, the sector is still pretty beaten up compared to before the Deepwater Horizon disaster – which nearly coincided with the overall market’s top in late April.

So where from here?

“A lot of smart money,” says Byron King, is betting the deep-water drilling ban will last “nearer 18 months, and maybe more.”

“The prompt effect of the moratorium is that the US is voluntarily surrendering the only geography – Gulf of Mexico, Atlantic areas, Alaska – that offers any substantial potential for future domestic oil output. Plus, watch the rigs migrate away to distant locales with less of that ‘political risk’ thing.”

According to Morgan Stanley, we get 1.5 million barrels of oil every day from the Gulf of Mexico. 1.2 million of that is from deep water. The United States consumes roughly 20 million barrels a day. So that’s 6% of our daily use that’s about to go away.

”Over the next year,” Byron continues, “we can watch as US oil output begins its drop off a cliff. And we can all watch in helpless frustration as US oil imports increase.

“That’s assuming imports are there to be had, in view of Peak Oil issues. For example, Mexico continues with its precipitous drop in output. There’s chronic instability in Nigeria. The Chinese are buying up everything they can lay hands on…”

Addison Wiggin
for The Daily Reckoning