Many analysts think that the crude-oil price will keep rising, with Goldman Sachs predicting it could soar to $200 a barrel within six months. However, much of this price spike is being driven by speculation, which has pushed the volume of trades on US oil futures from one million contracts a week in 2004 to more than 2.8 million this year.
There are also now clear signs that the underlying supply and demand balance isn’t as bleak as many assume. Over the weekend, Saudi Arabia pledged to increase oil production to its highest level in two years, just as the International Energy Agency slashed its 2008 forecast of oil demand growth to only 1.2%.
Turkey of the week: Cairn Energy, (LON:CNE) rated a BUY by UBS
I think that makes it time to get out of stocks that have benefited from the recent surge in the crude price. One is Cairn Energy, which has seen its shares double in the past 12 months. Cairn is an independent oil and gas producer operating largely in the Asian sub-continent. Even assuming today’s stellar oil prices continue, I’d still only value Cairn at £30 per share at best – 20% below today’s price. Should the oil price drop back to below $100 a barrel, the stock could nose-dive to £25 or lower.
And that assumes the Indian government doesn’t decide to renegotiate Cairn India’s lucrative profit share agreements in the same way that Russia did with BP and Shell. Four directors who offloaded over £1m of stock last week seem to concur with my more cautious view.
Recommendation: TAKE PROFITS at £36.40 (market capitalisation £4.8bn)
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments