What Drives Oil-Stock Prices for Bakken & Eagle Ford Firms?

Current the drivers of oil and stock prices are:

1. Company-Specific News. Example: On 24 and 25 February 2010, BEXP reported positive news on a Three Forks discovery in its Ross Prospect. That helped drive BEXP’s stock 8% higher on 25 February. Most news on these firms is good news.

2. News about close competitors in the Williston Basin can be a quite strong driver. The positive news on BEXP probably helped drive American Oil and Gas (AEZ) 10% higher on 25 February 2010. AEZ has unproven oil land leased close to BEXP’s proven leases.

3. The wider market is the chief driver of most oil E&P stocks on most days. I measure the wider market with the Dow Jones Industrial Average (DJIA); the Standard and Poor’s 500 (S&P 500) is probably better. When there is no company specific news the wider market is the strongest driver of oil stock prices.

When the DJIA moves, oil stock prices usually move in the same direction. If an oil stock does not quickly follow the market, you may have a window of a few seconds (or a couple of minutes) to act. That doesn’t always work, but it has worked for me more than 50% of the time.

Before the market opens, the wider-market futures will usually tell you the direction of oil stocks. The listed 5-year beta for BEXP is 3, and the listed beta for AEZ is 2.2. But these are based on the last 5 years. I believe the current actual beta for AEZ is more than 3. Stock price for AEZ and BEXP generally move with the market but three times as fast. You don’t need leveraged market ETFs. BEXP and AEZ work better for me. Just look at the volume in these tiny stocks.

If oil prices get too high, all bets are off. Really high oil prices cause oil stock to rise and the DJIA and S&P 500 to fall. Thus the DJIA no longer drives oil stock prices.

4. Currently, oil prices are a driver of oil stock prices, but not nearly as much as most people imagine. For one thing, most of the small oil companies are heavily hedged, one to two years out. Keep oil prices in mind, but the DJIA is usually a much better predictor on most days.

5. Natural Gas prices are a driver for NG producers (e.g., Petrohawk, HK) but usually not as strong as the market in general.
.