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The oil price has plunged 20% in 3 months: is now the time to buy oil stocks?

The West Texas Intermediate (WTI) oil price, the reference oil price, has fallen 20% over the last three months despite a range of reasons why investors should expect the opposite. In normal circumstances, economists and investors would expect the oil price to rise when geopolitical factors align to constrain supply. Consider the current global situation;

  • Wars in the Middle East;
  • Rumours of slowing oil supply out of Saudi Arabia;
  • Sanctions on Russia’s oil distribution; and
  • Solid economic growth in the US and Asia.

However, over the last three months investors have watched as the oil price plunged from US$107 to around US$85, where it has remained for the last week. It’s been a tough time for investors in some of Australia’s largest oil and gas producers.

Big Losses

Santos Ltd (ASX: STO) fell 20% from a high of $15.27 to a low of $12.25 and now sits at around $12.80. Oil Search Limited (ASX: OSH) shares have fallen from $9.77 to $8.60, however they fell as low as $8.12 earlier in the month, while Woodside Petroleum Limited (ASX: WPL) fell 13% from a high of $44.23 to $38.22. It has since recovered to nearly $40.

Range-Trading

An interesting fact I found is that the oil price has hit these levels six times in the last five years. Almost all of these periods have been good times to buy the strongest local oil producers. The three companies above remain profitable at these oil prices, however it’s touch and go for many of the shale oil fields in the United States.

Outlook- Time to Buy?

The three companies above are all trading at significant discounts to their recent highs. Over the next 2-3 years analysts expect that Santos and Oil Search will become huge dividend payers, much like Woodside is now.

If you’re going to buy into oil stocks, now appears to be as good a time as ever.

While I would avoid mining services companies, there's a 'hidden' set of resources stocks the market is simply overlooking. Discover the names and codes of these 3 surprising ASX plays now in The Motley Fool's brand-new FREE report. Simply click here for your free copy now.

Motley Fool contributor Andrew Mudie does not own shares in any companies mentioned. You can find Andrew on Twitter @andrewmudie

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