It’s been an interesting few months in the Oil and Gas sector. Just over 4 months ago, I made a post about the low price of oil and the many undervalued companies in the sector. Since then, things have gotten worse. Brent crude was selling at just under $50 per barrel in early August and The most recent price is just under $37.
The continued decline in oil prices can still be attributed to oversupply and stagnant demand. OPEC met in early December and decided to continue producing oil at the same rate, instead of cutting back the supply to allow oil prices to rise again after supply and demand stabilize. Check out this presentation called The Twin Oil Crashes of 2014-2015 by Nawar Alsaadi.
One of the big takeaways I got from this presentation is at the price of oil is currently well below the break even cost for new supply. If the price stays low enough, supply will start to come offline and supply and demand will be more in balance, most likely at a higher price. It’s hard to tell when this might happen, but eventually it will.
The other interesting part of the presentation is how much oil companies have cutback on capital expenditures. This lack of CapEx from the industry could lead to even higher prices in the future because of the constraints it puts on the supply of oil. The higher prices will result in increased investment and competition in the industry, which will eventually get us right back to where we are today. And so goes the boom and bust cycle.
The bottom line here is that it seems to me that current oil prices are not sustainable. I can’t tell you what the right price is and I most definitely can’t tell you when it will get there. In the meantime, I’ve put my money in companies that are conservatively capitalized that I believe can weather this storm. The hard part is looking at them in my portfolio everyday and watching them torture me.