US oil stocks ‘outrun fundamentals’ as prices surge

As oil flirts with $50 a barrel, investors are trading drilling stocks as if crude were selling for $80, and that’s the kind of optimism that leads to corrections.

US oil stocks ‘outrun fundamentals’ as prices surge

Legendary short-seller James Chanos said last week that he’s considering wagering against explorers because they’ve got ahead of themselves.

In the last three months, Denbury Resources, SM Energy and California Resources have all quadrupled in value as the price of oil rose.

“The equities have really outrun the fundamentals,” said Vincent Piazza, a Bloomberg Intelligence analyst.

“The bullish factors people have been looking at — the Opec-Russia freeze that didn’t happen, Nigerian oil going offline, Canadian wildfires — are all more transitory than anything else,” he said.

Since hitting a 12-year low in late February, an index of north American oil and gas explorers has surged about 65%, compared with the rise in West Texas Intermediate, the benchmark US crude.

“These stocks have come a bit far,” Gordon Douthat, an analyst at Wells Fargo, said.

Mr Chanos, the 58-year-old founder of Kynikos Associates, said north American oil and gas exploration was unprofitable when crude sold for $80 and $100, and is “certainly not economic at $45 oil.”

“A lot of those stocks have rallied up 200%, 300%, since mid-February,” Mr Chanos said.

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