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Where to next for the oil price?

Credit: greig davidson

Shares in oil companies experienced a strong week last week, with Santos Ltd (ASX: STO) and Woodside Petroleum Limited (ASX: WPL) rising strongly after the Organisation of Petroleum Exporting Countries (OPEC) announced production cuts. Other oil companies like Oil Search Limited (ASX: OSH) and Beach Energy Ltd (ASX: BPT) unsurprisingly also popped on the news.

source: Google Finance

source: Google Finance

The news also caused shares of BHP Billiton Limited (ASX: BHP) to gain 4% during the week, while Senex Energy Ltd (ASX: SXY) shares rose 8%. As we wrote here and here however, further sustained rises in the oil price appear highly unlikely, due to significant idle capacity as well as the fact that OPEC supplies less than half of the world’s oil.

Winners and losers from oil prices are likely to be more diverse than just the producers however, with Qantas Airways Limited (ASX: QAN) and Virgin Australia Holdings Ltd (ASX: VAH) expected to suffer significantly from higher oil prices – if they occur. Qantas shares were up just over 1% last week, while Virgin shares fell by the same amount.

One interesting sector of the market is the oil services companies, which could expect to benefit significantly from higher oil prices – because companies will increase expenditure on exploration and development, which has been cut to the bone in recent times. Some in the market are clearly watching for such an opportunity already – since Worleyparsons Limited (ASX: WOR) shares rose more than 5% last week.

Oil shares - especially service companies - remain risky, and I think investors are better off buying into companies with the ability to generate reliable sales. This is why The Motley Fool's  Top 3 blue chips for 2016 are a far better buy, in my opinion.

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Motley Fool contributor Sean O'Neill owns shares of Senex Energy Limited. 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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