Even After Spike, Crude Among Worst Energy Trade in 2011

There is no shortage of eye-popping superlatives around oil’s huge spike on Tuesday:

  • Biggest single-day percentage jump since April 2, 2009 (+8.55 percent).
  • Biggest dollar-jump since September 22, 2008 (+$7.37).
  • Highest settle since October 3, 2008 ($93.57).

Yet even after the intensity of Tuesday’s move, NYMEX crude still ranks among the worst ways to play energy so far in 2011. Including the spike, crude is up a mere 2.4 percent year to date, after spending most of the last seven weeks in negative territory.

Compare that to oil stocks—which as a group have climbed 11 percent to become the best performing sector in the S&P 500.

The Dow’s best performer this year? You guessed it: oil giant Exxon Mobil, up 17 percent.

So how did “oil the commodity” and “oil stocks” become so detached? One possible answer: lots of dealmaking.

“You see big international companies deciding where to put their chips down—and they’re saying U.S. natural resources aren’t a bad place to be,” said Ken Hersh of NGP Energy, a private equity firm with $10 Billion under management, on Tuesday’s Strategy Session.

The volume of mergers, takeovers, and joint ventures in the energy space may have put a bid under oil stocks, as oil itself languished.

It’s officially the best start of the year for Energy & Power M&A (both globally and in the U.S.) on record, according to Thomson Reuters.

At $93.7 Billion, it’s by far the most active sector, with some of the major deals including Duke Energy for Progress Energy ($25.7 Billion), Ensco for Pride ($8.7 Billion), and Holly Corp for Frontier Oil ($2.7 Billion).

And while M&A has helped, it’s not the only catalyst. “It’s important to note that the best performers in this sector have been the refiners, which of course benefit from lower oil prices,” says Fadel Gheit, Managing Director of Oil & Gas Research at Oppenheimer & Co.

Refiners’ profit margins are dictated by the spread between the input cost of crude oil, and the price of the refined product they sell, gasoline. As that divergence (known as the “crack spread”) has increased, refiners Tesoro, Frontier, and Valero have climbed more than 20 percent.

“And to a certain extent, the recent rally in big integrated oil companies like Exxon is a game of ‘catch up.’ Exxon has underperformed the S&P 500 for two consecutive years. That’s the first time that’s ever happened,” added Gheit.

One note: While oil has underperformed oil stocks, there is a worse energy trade out there: natural gas.

It has fallen some 15 percent in 2011. Yet we see the same equity outperformance here, too: big nat gas producers Chesapeake and Devon have rallied double-digits, as the price of what they sell has sunk.

Follow Strategy Session on Twitter: @CNBCStrategy

Watch CNBC's "The Strategy Session" weekdays at Noon ET.