Energy stocks may not be a sure win, but the risks seem low
The surge in the price of crude in response to a decision by the Organization of Petroleum Exporting Countries (OPEC) to cut production has greatly pushed up stock prices of the world ’s major oil companies.
I f y o u h av e t h e u r g e t o ride the wave, you can place your bet on the major US oil companies. But, if you insist on investing closer to home, your choice is limited to the few major State-owned oil producers from the Chinese mainland that are listed in Hong Kong’s H-share market.
In the three days since the OPEC agreement, the price of Brent crude had risen above 14 percent to a 17-month high of more than $54 a barrel last Friday. Some energy analysts predicted that oil prices will surpass $60 a barrel in the first half of next year.
But, buying energy stocks is not such a sure bet as it seems to be. Much of that will depend on whether all OPEC members are willing, or able to abide by the terms of the agreement. To some producers, the output reduction can put too much of a strain on their economies that had already been battered by the price slump in recent years.
Besides, potential geopolitical conflicts among some oil producing countries could flare up, leading to a breakdown in production limits. The cartel’s track record on production has been mixed.
Another factor that’ ll have a big influence on global oil prices is US shale oil. Years of cheap oil have failed to drown out the competition from US shale-oil producers, some of which have even gone broke.
But, those that have survived are the bigger ones with sufficient resources to invest in new technologies to make the process of extracting oil from shale much more costeffective.
Energy analysts expect these US producers to resume production profitably when the price of oil climbs above $50 a barrel. They may even get a boost from Donald Trump af ter he’s sworn in as president next month, as the Republican billionaire is known to favor self-sufficiency in oil.
Although the upside potential may be limited, buying energy stocks is not such a bad idea because the downside risk seems minimal at this time. The price of oil price isn’t going back to the $40-a-barrel level before the OPEC production-cut agreement.
The surge in the price of crude in response to a decision by the Organization of Petroleum Exporting Countries to cut production has greatly pushed up stock prices of the world’s major oil companies. But, buying energy stocks may not be such a sure bet as it seems to be.