Why you should wait before buying oil stocks

Oil and gas producers Origin Energy Limited (ASX: ORG) and Santos Ltd (ASX: STO) are amongst the biggest fallers within the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) on Wednesday after the oil price took a sharp dive overnight.

Oil fell around 5% on Tuesday night after US traders returned to work following the Independence Day holiday on Monday.

Brent crude oil is currently trading at around US$47.60 a barrel.

At lunchtime, Origin’s share price is 6% lower at $5.47; Santos’ shares are 4.6% lower at $4.50.

For long-term shareholders in energy majors such as Origin, Santos and Woodside Petroleum Limited (ASX: WPL) there could be an argument that their money would be better invested elsewhere, however, many will choose to ride out the cycle.

For recent energy investors, with the oil price up around 80% from its January lows, the decision is more about whether it’s time to take profits or not.

While there have been a few near term supply disruptions which have helped lift the oil price, the bigger picture of a supply glut for the next few years remains with OPEC members pushing ahead with high levels of production.

Given the strong rally in the oil price off what was a 12-year low, it’s reasonable to expect a retracement in the near term.

In my opinion there could be a better opportunity to acquire energy stocks in the weeks and months ahead.

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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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