by Josef A

Created on: May 22, 2009   Last Updated: May 26, 2009

It might be premature to go back into oil. Fighting has resumed in Nigeria, the largest African oil producer. Traditionally, problems in politically fragile oil-producing countries have helped lift oil prices and supported stock market prices of oil companies that have not been operating directly in the crisis region. Even if the troubles in Nigeria cut supply temporarily, it might not be for long and markets pay more attention to the prospects of the world economy. The changing outlook on the economy is essential to explain why both oil prices and oil companies started to recover some ground.

The demand and supply situation in the oil market is bullish in the middle and long run, whereas more negative news might weigh on global economic prospects and subsequently on oil prices in the near future. Long term, the resuming growth of mainly the Asian economies will outweigh the sluggish European and U.S. economic development and cause rising oil prices. However, a lot of positive news both in the U.S. and Europe have signaled a bottom of the deep recession and raised hopes of a recovery. The markets have already priced many of those good news and the oil price is up more than 50% from its lows, now trading above $60 again. To make it short: the timing is bad to go long in oil and oil stocks right now. If you are not in the market yet, you better wait for lower prices. It is quite likely that the rather optimistic outlook on the economy will be disappointed in the coming months and cause oil prices to drop again. Thereafter might be a good time to pick up some stocks with excellent long term perspectives.

If you invest in selected individual stocks, two suggestions for potential outperformers are presented briefly. The regions with the best growth prospects also determine where to allocate your capital when it comes to picking the right stocks. Petrochina (PTR), China's biggest oil producer, offers a solid growth perspective with the political backing of Peking. The expected dividend yield is close to 4 %, which can easily compete with current fixed income rates. The stock trades around $110 up from a low of around $57, so wait at least for prices around $100, better below $90. Another lucrative pick is Petrobras, short for Petrleo Brasileiro (PBR). The former Brazilian oil monopolist has the forth largest oil reserves of any publicly traded oil company and recently discovered large offshore fields that promise additional earnings when oil prices recover significantly. The price earnings ratio is just below 12, which is not cheap anymore, but appropriate given the future growth potential. The stock more than doubled from its lows in November 2008 and is traded above $40. Try to grab some pieces around $35. In both cases there is no hurry, most likely the market will see lower prices again.

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