The Investment Column: Oil stocks

THE LINK between oil stocks and the price of crude used to be clear and simple. When the oil price surges, the shares of the companies in the sector move accordingly, especially those involved in pure exploration and production (E&P).

Now it appears to have broken down. Yesterday, the price hit fresh nine- year highs, but the news had little effect on oil companies' shares prices - some, in fact, fell. This reaction - or lack of it - is a continuation of a pattern seen over the last year. Ten months ago, the oil price was languishing at $9 a barrel with some analysts gloomily pencilling in a floor of $5. Now Brent crude is touching levels not seen since Saddam Hussein was riding high in Kuwait and yet the stocks remain sluggish.

The broad oil sector, though, contains two different stories. The major oil companies such as Shell and BP Amoco have gushed ahead, benefiting from the merger mania of the last 18 months that has seen BP buy Amoco for $55bn, Exxon pay $80bn for Mobil, BP/Amoco take over Arco for pounds 27bn and TotalFina and Elf attempt to buy the other out for pounds 54bn.

Both BP and Amoco are carrying out major restructuring that will please the market if they achieve the current targets of pounds 4bn and $2.5bn a year.

Meanwhile, in the E&P sector, there is little excitement. According to one analyst, Mark Redway of Greig Middleton, it is simply a question of poor sentiment. E&P is a risky game and at the moment that sector of the market has been wooed away by sexier gambles such as the hi-tech and telecoms stocks.

The abortive merger between Lasmo and Enterprise, the two big players in the E&P sector, heralds further consolidation. Many of the smaller players, such as British Borneo, have been lacklustre. But with the oil price heading for $35, the recent share-price falls should represent a buying opportunity.