Investing Knowledge

LONDON (ShareCast) - Over the past 6 months the oil price has well over doubled, increasing from a low of $32.40 to be trading around $70.

The share prices of blue chip oil companies have not been able to keep track of this price surge and it is interesting to understand why not.

The Oil and Gas producers sector has gone from lows in March of 5,712 to be trading just short of a trend line resistance around 7,563, but still some way off the highs for 2009 at around 7,900.

There are a number of reasons for this underperformance not least the weakness of the US dollar. Combined with a fear about a rebound in oil prices the Chinese have been stockpiling oil while it's still comparatively cheap relative to last years highs. The Chinese, for various reasons are concerned about the value of the dollar, and given their concerns about US T-Bonds they have also been buying commodity assets like Gold, Copper and Oil while they are cheap.

While Royal Dutch Shell (Amsterdam: RDSA.AS - news) and BP are good value, according to analysts, relative to their P/E's, they trade between 8 and 10 respectively, and yield around 6%, that could change if the average oil price dips under $30, and their dividends could well be in danger of being cut.

Both stocks are trading below their highs for the last 6 months, the Shell (LSE: RDSB.L - news) high at 1,921p and BP at 566.50p. If this oil rally was based on anything other than fear, the stock prices of these two oil giants would in all probability be rising aggressively, as well, in line with the oil price.

In the long term the oil price should remain relatively well supported. However given that inventories are at record highs, the current upside in oil could well be limited in the short term to no more than $75-$80 a barrel, which is also equivalent to a key Fibonacci retracement level at around $76. This level is the 38.2% retracement of the decline from $147 to $32.

The EIA in its May report expected oil prices to remain at around average prices of around $55 a barrel in the second half of 2009, due to the fact that inventories among OECD members are quite high, and that current off shore storage is at, or near to capacity.

For periodic TA updates follow me on Twitter

Also read my Investors Guide to Technical Analysis and Level 2