Montreal, Canada

The bears are sweating in the oil pits…

U.S. crude oil reserves are sitting at a 27-year high this week. Despite soaring inventories, which would normally depress prices, West Texas crude oil opens the day at $78.91 a barrel. That’s a price level that’s certainly not consistent with bulging supplies of the stuff.

Oil has declined about 2% in 2010 while most other raw materials are heading through the roof. That includes the metals – both industrial and precious – as the dollar has corrected heavily recently.

The metals typically rally the most amid dollar weakness. But oil and most of the energy complex remain mired in a funk this year after big gains over the last eight years. Oil prices are still 46% below their nominal highs established in July 2008 ahead of the credit crisis. From that record high, prices thereafter crashed all the way down to $35.13 a barrel before more than doubling to about $79 now.

From its high earlier this year at $87.26, prices are down a modest 9.6%. That’s not a big hit considering inventories in the United States are busting at the seams. But supply and demand don’t seem to be working in the bears’ favor this year.

Or perhaps OPEC is the reason behind the resilient oil price.

OPEC (Organization of Petroleum Exporting Countries) has kept supplies rather tight over the last 12 months and can certainly pump more oil. Those tight supplies partially explain why oil prices are still high.

Another explanation is contango, the phenomenon tied to commodity futures trading. Oil prices have been in contango for a long time as futures prices continuously command a higher price than spot prices. That cost of carry makes holding oil futures more expensive – including ETFs that own these contracts.

Finally, a weaker dollar since this summer explains the rest of the enigma tied to high oil. Investors turn to raw materials as a natural hedge against dollar weakness as the former are priced in American currency. Since the dollar peaked in 2001, crude oil prices have soared more than 200%.

Among the major natural resource stock groups, however, the oil majors and natural gas companies are selling for a song. These stocks have lagged the broader rally this year and provide some pretty chunky dividends, low P/E multiples and strong cash-flows. I don’t think the market has discounted $75 or $80 oil in earnings estimates. And that makes oil stocks a bargain.