There's More to Trading Oil Than Handicapping a War

www.nytimes.com By PATRICK McGEEHAN

AS the world braces for potential war in Iraq, oil prices are at their highest in more than two years, and the profits of big oil producers and refiners have been rising along with them. But the lagging prices of oil-company stocks illustrate just how tricky it can be to speculate in the energy sector.

Professional oil traders place such bets every day, but few individual investors have been tempted, even as the drumbeat for war has grown louder. The New York Mercantile Exchange tried to attract more small investors last summer, when it introduced scaled-down versions of its main oil and natural-gas futures contracts, but those products "haven't really taken off yet," said Nachamah Jacobovits, a spokeswoman for the exchange.

On average, just 709 of these "mini" oil contracts and only 232 of the smaller natural-gas contracts change hands daily, Ms. Jacobovits said. She said individual investors seemed more inclined to bet on gold, a traditional hedge against inflation and economic upheaval. Trading in gold futures at the exchange is at a record, she said, with average daily volume of more than 61,000 contracts, up 60 percent from last year.

Oil trading is considerably more complicated than the gold market because oil prices are affected by so many forces of supply and demand. Lately, investors have been factoring in labor strife and disruptions in Venezuela and Nigeria, as well as an explosion on Friday at an Exxon Mobil fuel facility in New York.

According to the prevailing view among big investors, any war will probably be short and will be followed by a flood of new Iraqi oil that could halve the price of oil, now $35.58 a barrel, said John S. Segner, manager of the $275 million Invesco Energy fund. That expectation, he said, has been holding back the stocks of major oil companies the fund owns, like ChevronTexaco, BP and TotalFinaElf of France.

ChevronTexaco's stock, whose dividend yield is a healthy 4.37 percent, is down about 30 percent from its 52-week high of $91.60. BP, which yields 4.17 percent, is about 26 percent below its 52-week high of $53.98.

"The valuations of the companies don't reflect $35-a-barrel or even $25 crude, more like $19," said Mr. Segner, adding that he is bullish on big oil and skeptical about a quick and sharp increase in postwar supply. "I don't think it's going to be near as dramatic as that," he said. "The only way I see oil going below $20 is some unforeseen, dramatically negative economic event."

Too many investors are looking back to the Persian Gulf war as a guide, he said, but conditions are quite different now than in 1990. Most notably, he said, the inventory of oil is much lower than it was then, and the United States economy is coming out of a recession, instead of entering one.

Mr. Segner said he expected that a brief, successful war with Iraq would push oil prices back down to around $25 a barrel. At that level, efficient producers should continue to make a lot of money, he said. Unfortunately, he added, the returns on energy stocks diminish when oil prices spike as they have in the last few months. "They don't pay you when the prices get this high," he said.   DESPITE the boom that energy companies have been enjoying in recent months, funds like Invesco Energy have not thrived. The fund lost about 4.3 percent of its value last year, and it has lost almost 1 percent more so far this year.

Although those numbers are relatively strong for mutual funds that specialize in energy stocks, Mr. Segner characterized the flow of money into the fund as "not really going up, not really going down."

Rather than spending time speculating on the short-term direction of oil prices by buying or selling futures contracts, individual investors would be better served by studying the factors that will drive supply and demand, he said. As soon as the war in Iraq — if there is one — is over, oil drillers and refiners will face the challenge of finding and storing enough oil and natural gas to last the year.

"We're going to be struggling all year long just to refill to get ready for next winter," he said.