A bounce in the oil price this morning has brought much needed relief to a sector that's been under siege for the past year although a report that the recent tumble in the oil price could be worse than the 1986 crash will send shivers down the spines of shareholders in oil stocks.
The West Texas Intermediate (WTI) crude price has recovered most of its overnight fall as it jumped 0.9% this morning to $US48.86 a barrel and that was enough to lift the S&P/ASX 200 Energy Index (Index: ^AXEJ) (ASX: XEJ) by 0.3%, compared with a 0.2% slide in the broader market.
It's the oil & gas majors that are doing most of the heavy lifting with Oil Search Limited (ASX: OSH) jumping 1.9% to $7.16, Santos Ltd (ASX: STO) up 0.7% at $7.16 and Woodside Petroleum Limited (ASX: WPL) trading 0.5% firmer at $33.79.
Could this be a "dead cat bounce"?
A dead cat bounce refers to an unsustainable recovery after a hard fall.
The oil price has lost more half of its value over the past year and a report by Morgan Stanley questioning if the collapse would be the worst in three decades will certainly put any recovery in the sector under a cloud.
Most analysts, including those at Morgan Stanley, believe the oil price is probably close to bottoming if it hasn't already.
But there are some niggling doubts in Morgan Stanley's mind because one of its four predictions has not come to pass. This is the assumption that the oil price will drop.
The theory that the global oversupply of oil will correct itself as falling prices curb spending on drilling and exploration is not holding true since the oil cartel of the Organisation of the Petroleum Exporting Countries (OPEC) has actually ramped up production.
The good news is that OPEC may not have much more capacity but the wild card is Iran. If sanctions are lifted, the 3 odd million barrels of oil it pumps a day could flood the market.
But that's probably still at least three years away and oil stock supporters can cheer that the other three predictions by Morgan Stanley have so far rung true, which is a positive for the oil market.
- Demand will rise
Although China's economy has softened considerably, that hasn't stopped global demand for oil. In fact, demand has risen by about 1.6 million barrels a day over last year's average.
- Spending on oil will fall
Since October 2014, lower oil prices have forced energy companies to cut spending on new oil supplies. The number of rigs actively drilling for new oil globally has declined by about 42 per cent. Also worldwide, more than 70,000 oil workers have lost their jobs. A bleak picture indeed. To top off this list, listed oil companies this year to date have cut about $129 billion in capital expenditures.
- Stock prices remain low
Stock prices of oil companies have been steadily falling, potentially hitting the bottom of the barrel, making these stocks an attractive buy for those who are willing to stomach the near-term volatility. I second this view.
