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Have Oil Stocks Run out of Gas?

Have Oil Stocks Run out of Gas?
By Ron DeLegge
July 14, 2008

SAN DIEGO (ETFguide.com) - Despite the rapid rise in oil prices - the United States Oil Fund (Ticker: USO) is up 111.35% year-over year - major oil stocks as a group are up just modestly so far this year.

The Select Sector Energy SPDR (Ticker: XLE) is ahead by just 3.1 percent year-to-date, compared to around a 55 percent increase in the price of oil.* XLE contains 36 stocks which represent the energy sector of the S&P 500. Exxon Mobil, Chevron, and ConocoPhillips are among the fund's top holdings.

Other ETFs tracking the energy sector like the SPDRS S&P Oil Gas Exploration (Ticker: XOP) and Oil Gas Equipment (Ticker: XES) are doing much better. XOP is ahead by 24.1 percent and XES by 16 percent. Still, crude oilís performance has beaten those returns.

Why has the price of crude oil outrun oil stocks in 2008?

Many top oil producers are faced with geo-political problems in oil producing regions such as the Middle East, Nigeria, and Venezuela. These problems have hampered both exploration and production.

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Then too, thereís the problem of government control. Instead of letting companies easily export oil, some countries are nationalizing their oil industries and making it more difficult for oil companies to profit.

The good news for investors interested in owning a piece of oil stocks through exchange-traded funds (ETFs) are diversification, low expenses and reasonable valuations.

By design, ETFs own a group of stocks, so you can eliminate the risk of owning individual companies. Also, the expense ratios for ETFs are in many cases more than 50 percent less than competing mutual funds.

And with regard to valuations, according to AltaVista Independent Research, the collective P/E ratio for energy stocks inside XLE was recently trading at a modest 12.1. That gives energy stocks the lowest valuation of any S&P industry sector!

The near-term fundamentals for oil stocks look good. Even if crude oil prices reverse course and begin to crater, major producers shouldnít be hurt that badly especially since they havenít relied on rising oil.

From a longer-term perspective, oil stocks have a many issues to deal with. Among these are a host of alternative energy solutions such as wind, solar, and geothermal power that are chipping away. These emerging energy sources could reduce worldwide consumption and demand for oil , there by hurting profits for oil producers.

In the meantime, oil stocks havenít lost their touch quite yet. And it may be a while before they run out of gas.

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*Figures through market close of July 10, 2008

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