Recent forecasts from investment bank JP Morgan as published by Fairfax media indicate that Buru Energy Limited (ASX: BRU) could rise 191% to $0.96 per share by December this year.
According to the forecasts, published this morning, JP Morgan expects that falling oil prices are a temporary phenomenon, and that a weaker Australian dollar will see the value of domestic oil producers soaring.
Drillsearch Energy Limited (ASX: DLS) and Oil Search Limited (ASX: OSH) are also expected to experience minor price rises over the year, while Woodside Petroleum Limited (ASX: WPL) and Beach Energy Ltd (ASX: BPT) are tipped to fall 2% and 26% respectively.
So, should you rush out and buy oil stocks?
It’s hard to say.
JP Morgan forecast previously that Brent crude oil would be trading at $42 by the end of March – but prices stayed above $50.
Motley Fool analyst Mike King outlined the problems with relying on investment bank price forecasts in his excellent article here, while I myself had took a stab at the pitfalls of commodity price forecasts back in January.
Rather than play into the short term-ism of market forecasts, investors who want to get into oil stocks should think about the following factors:
- Australian oil producers are changing hands pretty cheaply
Not counting Woodside and Oil Search shares, other companies like Beach, Senex, Buru and Santos look to be reasonably cheap – I’m definitely considering picking up more Senex shares at today’s prices.
- It’s likely the price of oil will go higher in the medium term
Mainly because lower prices are costing the big producers like Saudi Arabia billions in lost profits.
However, investors also need to be aware that the price of oil is still above its long-term average, and should high cost producers remain in the market or OPEC nations not succeed in increasing their market share, prices could well go lower for longer.
It’s also worth pointing out that the oil market is hugely complex, with many moving parts; it is impossible to pick when it might bottom out. Be wary of false rebounds too, like when energy stocks pick back up despite little change in supply and demand.
- A low Australian dollar is a boon to production
Most if not all Australian producers are still profitable at today’s oil prices, and if/when oil prices recover, they could be set for a massive upwards re-rating.
However due to all the uncertainties in the market, particularly around where the bottom might lie, I can’t encourage readers to go and bet the ranch on JP Morgan’s price forecasts.
There are oil companies out there that look like a good buy right now, but be aware of the risks and buy cautiously.
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Motley Fool contributor Sean O'Neill owns shares in Senex Energy Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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