When crude oil prices rose following Hurricane Katrina, big oil company profits and stocks enjoyed a big rise.
As the price of crude rose, so did the big oil stocks, but several years later a similar rise in prices, even above Katrina levels, didn’t produce the same bump in oil stock prices.
Stock Price Quality
The reason may be that investors see a difference in the quality of the price increases.For example, Hurricane Katrina knocked out production in the Gulf of Mexico, shut down several key refineries along the Gulf Coast, and damaged a major pipeline supplying product to the upper Midwest.
Gasoline prices are very much driven by supply and demand. Crude prices may also reflect supply and demand, but not always.
Speculators can bid up the price of crude, but weak demand for gasoline will not allow prices to rise.
Stock Prices Lower
This creates a situation that cannot be sustained for long. If there is plenty of supply and weak demand, it doesn’t make sense that high prices for crude will continue.The lesson here is whether it is crude oil or stocks, over-supply, and weak demand will always mean lower prices.
High crude prices under these circumstances aren’t pushing oil stocks higher because investors know the true cost of oil is much lower.
If there is little demand for a stock, don’t expect to see its price rise because other circumstances seem favorable to the company.
This is one way to look at a value stock. You see a gem, others see a rock. Until other investors decide it is a gem, it will always trade a rock prices.
