En­ergy stocks may not be a sure win, but the risks seem low

China Daily (Hong Kong) - - BUSINESS | HK - PETER LIANG

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.

ED­DIE SEAL / BLOOMBERG

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.

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