It really is quite amazing the amount that spot oil prices have dropped. Naturally, in a lot of areas, the price of gasoline has not dropped the same percentage.
Lower oil prices help a lot of industries. The railroads and airlines, for instance, should show a material gain in earnings in the fourth quarter due to the drop in fuel costs.
It’s not a game-changer for oil producers just yet, but The Goldman Sachs Group, Inc. (GS), which is pretty good with its views on commodities, is now forecasting $75.00 West Texas Intermediate (WTI) oil for most of 2015—with oil prices maybe even hitting $70.00 a barrel. And all because of supply.
Anything to do with resources is higher-risk. And the higher investment risk is shared both by the capital (investors) and the explorers/producers whose business model changes with spot prices and derivative hedges.
But along with the higher risk comes the potential for higher rewards when prices are rosy.
A lot of junior energy producers, many of which were excellent wealth creators, got expensively priced on the stock market. And part of the reason why is that double-digit growth is such a difficult thing to come by these days. Therefore, when institutional investors find it, they bid it.
Volatility in commodity prices is a direct catalyst in resource stocks and this will never change. Even pipelines sold off with oil prices, even though many of them have long-term contracts that are not related to spot prices.
But in capital markets, swift price corrections often open the door to attractive opportunities. In many cases, really strong domestic oil producers just went on sale.
A lot of these growth stories would still be considered expensively priced compared to the rest of the stock market. But the production growth is still very real. Countless junior oil and gas companies are solid economic engines, even with $80.00 crude.
One large-cap that energy investors may wish to keep a close eye on is ConocoPhillips (COP).
The company was just trading for $85.00 a share; it’s now in the upper $60.00 range and has been in a downtrend for the last three months.
This position is not expensively priced and is now yielding more than four percent. This beats Chevron Corporation (CVX) and Exxon Mobil Corporation (XOM) quite substantially.
While oil prices will be the major catalyst for these stocks, I think a good new entry point will present itself over the next quarter for those looking for an oil investment that produces good dividend income.
Energy is a definitely worthwhile component in a well-balanced portfolio, and it can run the gamut from small-cap junior producers to well-established integrated players with pipeline assets, like Kinder Morgan, Inc. (KMI). (See “Crushed Oil Sector a Profitable Opportunity?”)
Previously in these pages, we looked at Northern Oil and Gas, Inc. (NOG), which just got slammed on the stock market because of the commodity’s price drop.
Lower oil prices could actually be the catalyst for industry consolidation among smaller-cap, domestic energy producers.
In any case, there are both pros and cons to what’s recently happened with oil. No doubt the business case will change again soon commensurate with spot prices.