Oil Stocks Gassed by OPEC

The possibility of higher prices sends Exxon and ChevronTexaco higher.
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Higher oil prices -- and oil stocks -- could be one of the unanticipated consequences of a weaker dollar.

The energy sector rallied Thursday, in part because Saudi officials hinted that they were effectively abandoning their preferred price band for oil as a result of a big slide in the dollar.

Oil-producing countries sell oil in dollars and buy products with other currencies, so a drop in the value of the dollar can impact their purchasing power. The greenback reached a record low against the euro Wednesday.

"OPEC learned the fallacy of fair price because a falling dollar takes some of the shine off their price band," said Phil Flynn, an analyst at Alaron Trading. "The new world order in oil means OPEC will do whatever it can to push up the price of oil to compensate for the 15% drop in the value of the dollar."

OPEC has said previously that it wanted to keep the price of oil in a range of $22 to $28 a barrel, but the cartel doesn't seem interested in defending the top end of that range. Saudi oil minister Ali Naimi said that "current prices are right. The dollar is weakening, and purchasing power is quite weak, so the price is OK."

OPEC is worried that oil prices will fall as Iraq begins to boost production, but it is also trying to capitalize on strong demand from the U.S. and China. Nymex crude oil rose 27 cents to $31.37 Thursday.

"We will become comfortable with $30 per barrel as a fair price eventually," said Flynn, adding that "the fair price of anything is what the free markets determine it to be."

At their meeting in Vienna, OPEC officials decided to keep output unchanged, as expected. In September, officials cut production by 900,000 barrels a day, but members haven't yet adhered to that agreement.

The Amex oil index was up almost 2% Thursday to a 16-month high and the Oil Service index rose more than 3%. While the OPEC news was bullish for the group, stocks were also gaining from a big jump in natural gas prices.

Natural gas prices rose sharply after a report from the U.S. department of energy showed stronger-than-expected demand. Natural gas prices have climbed 37% over the past eight sessions.

ChevronTexaco

(CVX) - Get Report

and

Exxon Mobil

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, which are big producers of natural gas, gained more than 1%.

Although higher oil prices are good for energy stocks, they can act as a drag on the overall economy. Oil-consuming industries were lower Thursday, with the AMEX Airline index down almost 3% to 60.38.