Believing Higher Oil Prices Are for Real

If there is someone who doesn’t believe that higher oil price are for real, it may be the oil stocks themselves.

While oil prices continue to rise higher almost daily, trading last night at $134.10 a barrel, the stocks of the largest oil-producing companies in the world are not running to new highs. Major oil producers, who have collectively seen first-quarter profits in excess of $50.0 billion, are not confirming the rally in oil prices.

In stock market analysis, a red flag is flashed when stocks do not move in the same direction of the commodity they are most dependent on. For example, if gold bullion prices are rising and gold stocks are not rising, it is not a good sign, because the stock market is not confirming (or believing in) rising gold bullion prices. The reverse is also true. If gold stocks are rising and gold bullion prices are declining, the stock market is saying that it believes any pullback in the price of gold bullion is temporary.

In my experience, the stock market is usually right. Hence, we find ourselves today in a situation where the major oil-producing stocks are off their price highs, while oil prices are near their record high. Just look at these three bellwether oil stocks:

Exxon Mobile Corp. (NYSE/XOM) shares trade at $88.62 today, down 8.5% from their mid-May high of $96.12.

Chevron Corporation (NYSE/CVX) shares trade at $100.37 today, down 4.1% from their mid-May high of $104.63.

BP plc (NYSE/BP) shares trade at $69.70 today, down 12.6% from their mid-May high of $79.77.

If we combine all the major oil stocks to see where they are, all we need to do is look at the Dow Jones Oil & Gas Producer Index. This Index makes up the largest U.S. oil producing stocks. In mid- May, this index was trading at 721.28. Today, it trades at 701.60.

The oil stocks are not moving to new price highs with oil prices. Known as “non-confirmation” to technical analysts, it is hard to believe that higher oil prices are for real when the stock market itself does not believe it. Personally, I’d have to see the major oil stocks move to new highs before I believe that higher oil prices are here to stay.