These should be good times for North American oil stocks. Petroleum prices have been hovering between $90 and $100 a barrel for the past 2 1/2 years and recently pushed past $105. Thanks to advances in hydraulic fracturing and horizontal drilling, American shale-oil fields such as the Bakken in North Dakota and the Eagle Ford in Texas have reversed what had been a two-decade decline. U.S. production now stands at 7.1 million barrels a day, up from 4.2 million in September 2005, according to the U.S. Energy Information Administration.
Despite the good news, oil and gas stocks have been laggards. Over the past two years, the Dow Jones oil stock index is up 7% vs. a 25% gain for the S&P 500. Much of the current worry is rooted in China's slowdown. In June, Goldman Sachs predicted that China's GDP growth -- once consistently north of 8% -- will fall to 6% later in the decade, which would inevitably crimp oil prices. Notes Charlie Wilson, a former energy analyst who is now an associate portfolio manager with Thornburg Investments: "You've had a decade where you've seen dramatic growth in energy demand, and China was a big piece of that -- 75% of incremental demand at times."