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3 reasons the worst could be behind oil shares

Shares in leading oil and gas producers continued to trend higher on Thursday, however, investors should expect a pull back on Friday after the price of oil retreated more than 1% overnight.

At the close of Thursday’s trading session:

  • Woodside Petroleum Limited (ASX: WPL) had gained 45 cents to $25.07
  • Oil Search Limited (ASX: OSH) was up 6 cents to $6.43
  • Santos Ltd (ASX: STO) rallied 13 cents to $3.82

The oil price lost close to 15% since mid-March before rebounding off recent lows around four days ago. Whether the market is just pausing before heading higher, or whether it was just a brief relief rally remains to be seen.

While picking the bottom or the turn in the cycle is an impossible task, there are a number of reasons why the worst could now be behind the energy sector with more upside potential than downside risk from this point.

Here are three reasons to be longer-term positive on energy stocks…

  1. US production is declining – One of the key results of a low oil price is the negative effect it has on marginal producers. In fact, data suggests around 700,000 barrels per day of US production have been removed from the market over the past year.
  2. The trend of tightening supply is also extending to exploration with the widely followed Baker Hughes showing a continued reduction in both the US and global drilling rig count.
  3. OPEC will eventually tighten – while the market keeps jumping up and down factoring in each new comment by OPEC member countries, on balance there would appear to be a strong incentive for OPEC to work together to restrict supply.

With high fixed-cost operations, energy producers enjoy leverage to higher energy prices.

Stocks such as Woodside Petroleum, Oil Search and Santos could all be expected to enjoy significant share price appreciation on the back of a rising oil price.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. 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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