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Why I think it is the time to buy S&P/ASX 200 oil & gas stocks

What a difference a month makes! The crude oil price suffered its longest losing streak in 34 years and that’s threatening to sink our largest oil stocks into “bear territory”, which is characterised by a 20% or more share price drop.

This presents a buying opportunity and I’ll explain why later in the article.

The global oil price is already in a bear market and the West Texas Intermediate crude benchmark’s 0.7% decline to US$60.23 a barrel – it’s 10th consecutive session of losses – means oil has collapsed 22% from last month’s peak.

Our oil stocks don’t seem too flustered by the news in early trade. The Oil Search Limited (ASX: OSH) share price rallied 1.2% to $7.79 while the Woodside Petroleum Limited (ASX: WPL) share price and Santos Ltd (ASX: STO) share price made modest gains of 0.2% to 0.3% each.

In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index lost 0.5% at the time of writing although shares in the three oil and gas majors have underperformed with losses of between 13% and 15% each since the start of October when oil prices started retreating.

Energy stocks were a hot favourite with investors back then as impending sanctions against Iran’s oil industry kept the sector on the front-foot. The country supplies as much as 1.5 million barrels of oil per day to the global market.

But US President Donald Trump has recently granted temporary exemptions to eight countries to allow them to keep buying Iranian oil and fears of a supply crunch have largely dissipated.

At the same time, other major oil exporters like Saudi Arabia and the US have been ramping up production at a record, or near record, pace.

Oil investors can at least take comfort that the pressure on the oil price is coming from the supply side, not demand side, of the equation. Demand for oil is still strong and this dip presents a good opportunity to buy oil stocks (if you are underweight on the sector).

The US exemptions aren’t expected to last for long either while seasonal factors are also depressing the oil price.

Crude tends to drift lower during this time of the year as many US refineries shut down for annual maintenance. This is about to end and demand for crude should start picking up.

Further, US shale oil exporters (a key contributor to perceptions of an oversupplied oil market) are generally high-cost producers.

While I can’t seem to find reliable data on what the average cost of production is for the US shale industry, it’s widely accepted that these companies need crude oil to stay above US$50-US$60 a barrel for them to be commercially viable.

This means they are the marginal producers and the oil price can’t fall much lower on a sustained basis without US oil companies shutting production.

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Motley Fool contributor Brendon Lau has no position in any of the 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 Scott Phillips.

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