|Well, well. It looks like the brain trust at OPEC may have finally hammered out an arrangement to lower its price-crushing oil production levels. All I can say is: it’s about time.
Don’t get me wrong. It’s not that I want to pay more for gasoline. I don’t. I’ve enjoyed the cheap fuel as much as anyone. But pumping as much oil as possible in order to push prices lower and drive marginal producers out of business is just stupid. For starters, it’s a direct attack on U.S. business…
Yeah, I know, that’s the way capitalism works. If you can’t price your product competitively, then you deserve to be undercut by those who can do the same job cheaper. Of course, people don’t always like this aspect of capitalism. When it means you buy cheaper blue jeans, chicken, or gasoline, yeah, people love it. But when it means Levi’s starts manufacturing those blue jeans in Malaysia so it can sell you cheap jeans, well, not so much. Because they’re stealing our jobs…
To date, the Saudi oil strategy has driven around 65 U.S. oil companies out of business, cost well over 100,000 jobs, and saddled both individual and institutional investors with hefty losses. Why the U.S. officially calls the Saudis an “ally” is beyond me. But whatever, it’s not my call. I’m here to talk about oil.
West Texas Intermediate Crude (WTIC) is flying higher this morning. It’s up 8% to about $49 as OPEC has apparently agreed to cut 1.2 million barrels of production a day. U.S. production is already down about a million barrels a day. So this cut really is meaningful. It basically ends the oversupply.
The deal has some pretty surprising elements. Like, the Saudis apparently agreed to “allow” their mortal enemy Iran to raise production. Iran had its production levels cut way back by nuclear sanctions. It wants to be able to produce at pre-sanction levels, and Saudi Arabia is actually in agreement.
Of course, there is a ridiculous amount of oil in storage. It’s going to take a while to work off all that inventory. But at least we won’t be adding to it.
Former Saudi oil minister Sheikh Zaki Yamani once famously quipped, “The Stone Age did not end for lack of stone, and the Oil Age will end long before the world runs out of oil.”
The Stone Age
I’m sure that clever quote plays well at cocktail parties. But any attempt to use it to justify the Saudis’ overproduction is silly. I’ve seen it suggested that the Saudis don’t want to have oil in the ground when the world finally moves on from fossil fuels. That somehow justifies selling as much as possible now, while it still has value. But if you think about it, that makes zero sense.
Sure, the world will move on from oil at some point. Is that point dictated by the cost of oil? I would say no. The entire world infrastructure is geared toward fossil fuels. Did global oil demand drop when oil was $100? No, not really. Because much of the developing world has come of age with expensive oil. Like China. The Chinese consumer has come of age with $100 oil, and demand there grows.
Either way, the Saudis will sell 12 million barrels of oil a day between now and the end of the oil age. The only question is: do you want to sell it at $80–$100 a barrel? Or $40–$50? Who gives a crap if there’s leftover oil?
I guess the Saudis finally invested in a decent calculator.
So now, the big question for us as investors is: can we still buy oil stocks?
Sorry, I’m not going to drag out the mystery. You can buy oil stocks, and you should. Because despite the fact that oil stocks are up big today (my favorite that I’ve recommended before is up 21% today to $14.25), there is more to come. Ummm… Yes, You Can Still Buy Oil Stocks
As I said earlier, the U.S. benchmark WTIC is up to about $49. Last week, it was around $50. WTIC could easily trade to the $60–$70 range in the near future. That, in turn, would push money-losing U.S. oil companies back into the black.
Now, I doubt U.S. oil stocks will trade back to their pre-crash levels. You have to price in some skepticism, because the Saudis can easily go wingnut and open the pumps any time they want. And truth be told, betting against a wingnut move from the Saudis is a pretty bad bet. Still, even a partial recovery of their former glory will mean some big gains for these stocks.
So, my favorite oil stock is Oasis Petroleum (NYSE: OAS). I’ve recommended it several times. And I’m still recommending it. It was over $50 a couple years ago. Today, it’s busting through $14. Could it hit $20? Sure. No problem.
Oasis is a Bakken oil company. It is very good at horizontal fracking. You might also want to look at some Permian Basin companies. That prolific field has lower-cost oil than the Bakken. Callon Petroleum (NYSE: CPE) and Laredo (NYSE: LPI) are worth looking into as well.
One final entry: Canada’s Crescent Point Energy (NYSE: CPG). This one actually still pays a small dividend. Because it’s Canadian, Crescent Point tends to fly a little below the radar. Shares aren’t jumping as much as more obvious names. And that may mean there’s more upside on a percentage basis coming.
There’s no need to overthink this: go ahead and buy an oil stock. There’s upside coming.