Oberweis on oil: A long-term overview

Though best inown for his expertise in assessing small cap growth stocks, Jm Oberweis Jr. is also a top-notch analyst and money manager with keen insights on macroeconomic events.

Here,  the editor of The Oberweis Report takes a look at the fundamentals and psychology underlying the oil markets, offering a look at the likely long-term outlook for oil and select oil service stocks.

"Look no further than the crude oil market for a case study in price volatility and rapidly changing investor sentiment.  One month ago, in the face of $147 crude oil, the bulls were stampeding and brazenly promoting price targets of $200, $250, or more.

"Politicians were assailing the dreaded 'speculator,' likely because it’s easier to blame a fictional villain than look in the mirror and accept responsibility for contributing to an inept (or arguably non-existent) national energy policy.

"Yet that was then, and this is now.  Now, after a rapid 16% decline from the peak on July 11, the oil bulls have vanished into the FBI’s witness protection program.

"The bears are on the prowl, talking about 'demand destruction'  resulting from a weakening global economy, fewer miles driven by American motorists, and a rumored armada of oil tankers steaming to our shores from Saudi Arabia to save the day. The oil bubble has burst.

"Was it a bubble? When investor sentiment swings like a pendulum as quickly as it does in this environment, we find it helpful to check our emotions, look at the facts and dust off the old economics textbook and revisit the concept of 'supply and demand.'

"The facts suggest that we are addicted to oil and that the rest of the world is becoming addicted too.  Growth in demand for crude oil has accelerated in each of the last three decades. 

"Between 1980 and 1990, according to the Energy Information Administration (EIA), worldwide daily demand grew 5.7%.  Demand growth accelerated to 15.0% between 1990 and 2000, and should accelerate again in this decade, with growth of 10% already from 2000 through 2006.

"OPEC estimates that the world will demand 113 million barrels of oil per day in 2030, up more than 33% from 2006. 

"The driver behind this accelerating demand growth is the industrialization of emerging economies like China, India, Brazil, and other Far East countries.

"Using the U.S. as the benchmark for the industrialized world, the data suggest that the potential future demand for oil is so staggering that the odds of supply keeping pace seem almost insurmountable. Consider this:  the U.S. economy consumed over 7.5 billion barrels of oil in 2006 to produce $13.1 trillion in GDP.

"China, India, and other developing coutries currently use substantially less oil per dollar of GDP, implying plenty of runway for demand growth as emerging economies develop an industrial base and their populations accumulate wealth and consume more goods and services.

"China, for example, uses less than half the crude oil to generate $1 of GDP than the U.S. does.  India uses nearly 60% less oil per $1 of GDP than the U.S. Oil consumption relative to population also points to further demand growth in developing countries.

"The U.S. economy and its 301 million inhabitants consumed over 7.5 billion barrels of oil in 2006, while China and its population of 1.3 billion consumed only 2.6 billion barrels. India’s 1.1 billion people consumed just shy of 1 billion barrels. Just wait until the average Joe starts to drive a car in China and India.

"The bears argue that high oil prices, changing habits, and a weak U.S. economy will result in slackening demand and lower oil prices. 

"While current economic headwinds could batter oil prices and energy stocks around in the short-term, be mindful of the big picture: emerging economies will thirst for even more oil in the future, and the ability of supply to keep up is more questionable than ever.

"Short-term weakness in energy will  yield again to a crude reality, which means a smart investor focused on the big picture can take advantage of energy stocks on sale now at a stock market near you.  

"Companies like T-3 Energy Services (NASDAQ: TTES), Willbros Group (NYSE: WG), Dawson Geophysical (NASDAQ: DWSN), Carrizo Oil & Gas (NASDAQ: CRZO), and Rex Energy (NASDAQ: REXX) are riding a rising tide likely to lift all boats.  Don’t get caught in the undertow."