Oil stocks have been targets for jokes and hatred from the average citizen for years. The common thinking is that oil stocks are evil organizations bent on destroying the world and generating as much corporate profits as possible along the way. But I think there’s a big gap between reality and perception. Oil stocks are no different than any other business; their goal is to try to generate corporate profits for the shareholders. Being an evil organization is a comment on morality, while I suggest that the motives for corporate profits should be applauded. I would say that oil stocks are simply doing on a larger scale what every business attempts to do, which is to try and generate corporate profits. Without corporate profits, you have no company and hence no jobs. We’ve seen what happens when a society is not run for profit, with the collapse of every communist nation in the world, such as the former U.S.S.R. China has only succeeded because it’s now embraced the notion that, to thrive in the world, businesses must generate corporate profits.
The truth behind oil stocks such as BP p.l.c. (NYSE/BP) is that they have spent billions of dollars on green energy initiatives. BP, for one, has invested over $7.0 billion since 2005. While some naysayers might think this is just a PR stunt, I disagree. I think the truth is that oil stocks like BP see the potential for large corporate profits over the next century. While corporate profits through their production of oil have been significant, even firms like BP know there’s a limit to how much they can extract. It’s just common sense to use the corporate profits from oil to develop new alternative energy sources.
Since 2005, the BP Alternative Energy division has grown from just a couple of employees to 5,000 currently. The hunt for corporate profits involves biofuel, wind, solar and any other possible avenue to generate energy. All of life is based on incentives, and the drive to increase corporate profits is the purest of all. Without this drive, we would be nowhere near as technologically advanced as we are today. Oil stocks should not be reprimanded for their hunt for corporate profits, as this is the goal of everyone, from a large organization to a small business owner.
Stock chart courtesy of www.StockCharts.com
The chart of BP has some interesting signs from a technical analysis point of view. Oil stocks have been hit lately due to the pullback in the price of oil, but BP has recently made a bullish divergence. Note the arrows in the price of BP, making a new price low, but both the relative strength index (RSI) and the moving average convergence/divergence (MACD) made a higher low. Although this is a bullish indication, there is a significant amount of resistance on the way back up. As with other oil stocks, the overhang of lower oil prices isn’t helpful combined with the formidable areas in which sellers will most likely emerge. A move to the 50% retracement level, which also coincides with the 200-day moving average, will most likely see significant resistance.