Oil hits 4-month high: Are oil shares cheap?

Shares in oil and gas companies continued to rally on Tuesday as investors reacted to news that the oil price had hit a four-month high.

Oil enjoyed gains of 8% last week and that momentum has continued into this week as traders pin their hopes on an upcoming meeting of OPEC members where they expect measures will be agreed for reigning in supply.

Amongst the top gainers at midday on Tuesday were:

Complex dynamics

While OPEC in theory has the power to move the oil price higher, in reality getting members to agree is proving a tough ask. Even if a restraint on production volumes is agreed to, it may not be enough to actually swing the market from its current position of oversupply.

It’s important that investors don’t get caught up in the realm of speculating on near term price movements given the complex dynamics of the oil market.

Instead, stay focussed on determining the intrinsic value of oil and gas stocks. While this does require guess work in terms of estimating a through the cycle oil price, arguably we are nearer the bottom of the cycle which can allow conservative estimates to be more easily made.

The cycle will turn

One thing which is pretty much assured is that eventually the cycle will turn for energy stocks. While it might seem like there is no light at the end of the tunnel, that’s exactly when savvy investors can acquire bargains.

It won’t just be savvy investors either. Savvy management teams are doing their best to make the most of attractive prices. For example, Beach Energy has already implemented a merger with Drillsearch, while Woodside proposed and then withdrew a merger offer with Oil Search Limited (ASX: OSH).

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Motley Fool contributor Tim McArthur owns shares in Origin 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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