Oil's flimsy fundamentals
No longer being deeply oversold by investors, I have to assume that the oil services group is now largely trading up on the improving price of crude, which has risen more than 60% from its February nadir of around $42 per barrel. (I'm ignoring the exaggerated effect of the January futures contract expiration.) This is exactly why I'm nervous about these stocks today.
And what do Rex Tillerson and Daniel Yergin say?
Rex Tillerson, chief executive of ExxonMobil (NYSE: XOM), said fundamentals didn't justify $70 oil in September 2007. After the demand destruction that's followed, he obviously doesn't think much of this latest rally in crude, calling it "just a bet" on the part of traders.
Daniel Yergin, author of The Prize and chairman of IHS Cambridge Energy Research Associates (CERA), is in pretty much the same boat, pointing to a 3 million-barrel-per-day drop in demand to pre-2005 levels. He attributes oil's performance more to the stock market rally and the falling dollar.
If Yergin is correct on this point, and I believe he is, then there are two reasons to be concerned.