Crude Over $90 Hurts Oil Stocks

There is now a benchmark crude price of lessening returns for the oil companies as it relates to their need to import and the profitability on those imports. It's difficult to be absolutely sure about this threshold price, as profits will necessarily lag the immediate costs we're seeing in the market. However, we are dealing with a futures market, with forward prices of at least one month, so it's not a bad place to look.

The price of a barrel of oil in mid-October: about $90.

The price of a barrel of oil today: about $90.

Perhaps not a perfect number, but I'll bet it's close -- as the price of oil soars above $90 a barrel, the oil companies refining that oil start coming up against margins of lessening return. And while I'm not a fan of the oil sector right now in general, I'm much happier having exposure to oil at these lower prices as opposed to a market that is streaking ever higher toward and above $100 a barrel.

I've recommended foreign oil exposure recently, simply because those companies are not nearly as tightly constrained by U.S. margins on refined products: Petroleo Brasileiro (PBR - commentary - Cramer's Take) and Sinopec (SNP - commentary - Cramer's Take), to name two.

It's an interesting idea to imagine that upward pressure on oil prices doesn't necessarily translate to upward pressure on oil stocks, but that's the environment we're operating in right now. If margins are permitted to move in parallel with the price of the raw crude barrel and we see $5- or $6-a-gallon gasoline, all this will change again. But until then, watch the benchmark price of crude to direct your exposure into consolidated oil stocks.

Perhaps even more interesting is the question: If higher oil prices aren't necessarily good for ExxonMobil, whom are they good for? In fact, the only pure winners from $100 crude prices are the OPEC suppliers -- and by extension, the sovereign funds they represent that are applying such influence right now in the international capital markets. Perhaps I'll tackle that idea in my next column.

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At the time of publication, Dicker was Petroleo Brasileiro and Sinopec, but positions can change at any time.

Dan Dicker has been a floor trader at the New York Mercantile Exchange with more than 20 years' experience. He is a licensed commodities trade adviser. Dan's recognized energy market expertise includes active trading in crude oil, natural gas, unleaded gasoline and heating oil futures contracts; fundamental analysis including supply and demand statistics (DOE, EIA), CFTC trade reportage, volume and open interest; technical analysis including trend analysis, stochastics, Bollinger Bands, Elliot Wave theory, bar and tick charting and Japanese candlesticks; and trading expertise in outright, intermarket and intramarket spreads and cracks. Dan also designed and supervised the introduction of the new Nymex PJM electricity futures contract, launched in April 2003, which cleared more than 600,000 contracts last year alone. Its launch has been the basis of Nymex's resurgence in the clearing of power market contracts over the last three years. Dan Dicker has appeared as an energy analyst since 2002 with all the major financial news networks. He has lent his expertise in hundreds of live radio and television broadcasts as an analyst of the oil markets on CNBC, Bloomberg US and UK and CNNfn. Dan is the author of many energy articles published in Nymex and other trade journals. Dan obtained a bachelor of arts degrees from the State University of New York at Stony Brook in 1982.