Oil Stocks May Have Outrun Oil Prices

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It's too simplistic to value oil company stocks on the price of crude alone. But if oil prices are one marker, oil shares are probably rising too high.

Chevron's (CVX) stock is trading at $107. It was only $100 when crude moved above $120 in mid-2008. ConocoPhillips (COP) trades at $81, not far below its 2008 peak of $94. Conoco shares are rising so quickly that they could easily reach their all-time high in a few weeks. Even the world's largest oil company ExxonMobil (XOM) recently hit $88, near its 2008 top of $95.

There are a number of differences between these companies. Some have larger refining operations, which can face margin pressures when the cost of oil is up sharply. Some have put more money into exploration and have increased oil reserves. Others have bought tracts of oil-producing land or deep-sea deposits. Still others have formed alliances with foreign governments to increase reserves.

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Despite all of the differences among them, each company has a stock chart that rose in 2008, reached new highs, dropped as the price of crude retreated in 2009 and 2010, and is now on the march up once again -- very possibly to new highs.

That pattern is what makes investments in these stocks risky. Crude prices have been driven up to a large extent by trouble in the Middle East and demand in the developing world. The political war in Libya could end soon. The Saudis may be able to give enough money to their citizens to avert a revolt there.

The developing world has troubles of its own. Inflation in China has caused the government to tighten monetary policy to combat inflation. The central government has moved down growth targets. Austerity programs in Europe and the Japan earthquake could hurt demand for Chinese goods. Its tremendous GDP engine could slow.

It's easy to say the price of crude will move relentlessly higher and with it oil company share prices, but it's hardly a sure thing.
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