Some See Opportunity in Oil Stocks

HALLOWEEN is just around the corner - and that may help explain why oil stocks are suddenly perceived as opportunities for investors. Oil has been a bogeyman commodity ever since production cutbacks and price hikes were first imposed by the Organization of Petroleum Exporting Countries (OPEC) in 1973-74. Nor did the Exxon Valdez spill help the industry win points from the general public. Moreover, most oil stocks have lagged the market since the start of this year.

But now oil stocks appear poised for takeoff, according to some analysts.

``We have hesitated to commit to the energy area all year,'' says John Connolly, senior vice president of Dean Witter and Company. ``The group,'' he notes in a recent Dean Witter newsletter, ``has underperformed for eons.'' Thus, Dean Witter has tended to remain underweighted in oil stocks, recommending that portfolios contain fewer oil shares than the industries economic weight in the total economy would justify.

But guess what? Dean Witter is now jumping on the oil/energy bandwagon. ``At long last,'' Mr. Connolly concludes, ``energy fundamentals look decent ... therefore we have canceled our deep underweighting and opted for the first time in years for a slightly overweighted position.''

Connolly's newfound enthusiasm revolves around two factors: OPEC's growing ability to maintain its political cohesion and thus influence prices; and the declining production of some major non-OPEC producers.

Connolly notes that there have now been production peaks in many large fields, including the North Slope. Further, Connolly believes that in the next few years there ``will be a pronounced output decline by the world's largest producer, the Soviet Union.''

``Non-OPEC supplies,'' Connolly says, ``will be increasingly hard to find.... The most likely outcome now appears to be a bias toward higher prices and at a rate faster than general inflation.''

Not all oil analysts, it must be noted, assume prices will climb. Earl Gaskins, an analyst with Provident Capital Management in Philadelphia, believes oil prices may actually head downward in the period ahead. He notes there are ample supplies of oil, as well as a proclivity of OPEC producers to cheat on quotas.

And Frederick P. Leuffer, an energy expert with C.J. Lawrence, Morgan Grenfell Inc., believes that as a group ``oil stocks should continue to underperform.'' Thus his investment house is currently recommending an underweighting in oil issues.

However, Rosario S. Ilacqua, an oil analyst with Nikko Securities Company, International, Inc., says, ``If OPEC can keep its house in order'' there will be an upward movement on price. Politics, and not general economic trends regarding supply and demand, is a key determining factor in the oil-price equation, he holds.

OPEC producers will meet in Vienna Nov. 25 to review current production quotas.

Assuming OPEC maintains its cohesiveness, Mr. Ilacqua believes prices will be at least a dollar or so higher during the next year. That means OPEC oil would climb to $19 to $20 from its current $18-per-barrel range. West Texas Intermediate, the benchmark crude in the US, would move to about $21 or so from the current trading range of around $20.

Ilacqua also notes that non-OPEC production is sliding, including in the US, Canada, and Soviet Union.

British production, he says, is ``disappointing.'' Norway's output is rising slightly, but not by much, although Norwegian officials publicly claim that they are holding back to mesh their output with OPEC goals.

Ilacqua, for his part, likes three major oil stocks: Imperial Oil, a big producer in Canada, Texaco, and Amoco (the latter mainly as a ``natural gas play'').

Mr. Leuffer sees supply and demand as basically in balance now, which should help reinforce existing prices. The dollar has continued to strengthen, making oil, which trades in dollars, expensive. Petrochemical capacity (especially in ethylene and polypropylene) is ``surging, while chemical profits are slipping.''

Leuffer likes a number of oil/energy-related issues, including Kerr-McGee, Chevron, British Petroleum, Texaco, and USX (US Steel).