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Why oil stocks could be better placed than miners during a commodity meltdown

The mining and energy sectors are on the nose again as the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is poised to record its sixth consecutive trading day of losses.

It’s the miners like BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) that have been severely underperforming recently, but our oil and gas producers haven’t been doing much better as the higher US dollar and escalating global trade tensions have weighed on commodity prices.

But oil stocks could be better placed to weather the commodity storm even as the S&P/ASX 200 Energy (Index:^AXEJ) (ASX:XEJ) index shed 6% over the past month, when the broader ASX 200 benchmark dipped 1.6%.

Unlike iron ore and copper prices, the price of crude may have a floor.

The world’s most influential oil player, Saudi Arabia, is aiming to keep the price of crude between US$80 and US$70 a barrel, according to a report on Reuters.

Saudi Arabia holds the world’s largest oil reserves (conventional at least) and can single-handedly move the oil price.

While the Arabian nation has no formal price target for crude, the Reuters report is believable as several industry experts and officials have echoed similar figures over the past several months.

The target band also makes political and economic sense. Saudi Arabia doesn’t want to offend US President Donald Trump, who is intent on keeping the oil price low to win votes for Republicans in the upcoming November elections.

But the Saudis need a firm oil price to pay for a string of economic development projects and the conventional belief is that the US$70-$US80 per barrel price range meets both these objectives.

This is good news for the likes of Woodside Petroleum Limited (ASX: WPL), Oil Search Limited (ASX: OSH) and Santos Ltd (ASX: STO) if investors can have confidence that the bottom won’t fall out of the oil market.

What’s more, the oil price ranging between these two goalposts also makes Woodside and Oil Search attractive from a valuation perspective, in my view.

Furthermore, the uptrend in the US dollar will provide a further tailwind to Aussie energy stocks, particularly those with a large Australian dollar cost base.

However, as much influence as Saudi Arabia has on the market, you shouldn’t be surprised if the oil price does overshoot to the down – or upside – at least temporarily – as commodity prices are difficult for anyone to control with finesse.

Nonetheless, bargain hunters should make use of any material dip in the share prices of our leading oil and gas stocks as a buying opportunity.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited and Rio Tinto 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 Scott Phillips.

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