OPEC has announced that its members will reduce production by as much as ten percent and Oil Stocks went up. Market Watch says to disregard this news because oil stocks look dangerous still.
It’s been a wild ride where crude is concerned, with prices soaring to $49 a barrel after news that OPEC is going to indeed deliver a production cut.
No sector has more riding on the deal than energy stocks, which are leaping ahead this morning. Thanks to a recovery in crude prices, the energy select ETF XLE, +5.36% has risen 17% year to date, though it’s off 2.6% this week. It stands to reason that an oil pact would make those gains sweeter.
But our call of the day says not so fast – oil stocks are “dangerous” to own, no matter what kind of short-term pop they might get from OPEC news.
Market Watch is basing their opinion on technical patterns. Are Oil Stocks Dangerous from a fundamental point of view? If OPEC does not follow through with production controls their total production will continue to climb in the face of weak global demand for oil. And OPEC is famous for deciding to cut production and having its individual members cheat on the side.
Which Oil Stocks?
There are big oil stocks and small drilling companies. There are the people who make submersibles to deal with issues at great ocean depths as drilling goes further and further offshore. There are the high tech fracking operations that drove US oil production up by 50% in just a decade and are becoming increasingly efficient. According to The Wall Street Journal big oil will start spending again in anticipation of increased demand and higher prices.
The prospect of rising oil prices has the global energy industry considering a strategy that has been unthinkable for much of a two-year-long market slump: Making new investments.
Big oil companies are moving ahead with new spending again, says BP PLC Chief Executive Bob Dudley on the sidelines of the Oil and Money conference here. The British oil company he heads has taken final investment decisions on a handful of projects this year and is expected to approve more in 2017, he said.“Investments are back,” Mr. Dudley said. “But it’s only going to be the very best.”
Our sister site, Profitable Investing Tips, asks if you can make money on oil these days.
It turns out that extraction per well is more efficient with newer technologies allowing extraction of twice as much oil per day per well compared to just a decade ago. Drilling of new wells has dropped off by as much as 60% but current wells are still producing. The breakeven point for a high producing well is $30 a barrel and $50 a barrel for a moderate producing well. Thus a small increase in oil prices will drive up profits for fracking operators. When profits go up drilling for new wells will resume. Where to make money in oil these days with the promise of higher prices could well be with oil drilling companies and companies using the high tech fracking technology.
Well-chosen projects will be profitable but oil stocks may still be dangerous for companies with cash flow issues and without deep pockets.
