This Junior Oil is Set to Rebound
With the recent rapid decline in oil prices from $100 to $55 the stock market has rapidly re-priced oil producers as though $55 is here to stay…..forever.
The stock prices of junior oil producers haven’t just gone down, they have been CRUSHED….
But what happens if it turns out this $55 WTI oil price is a temporary phenomenon? What if we have oil prices back up to the $70 to $80 level early in 2015?
The answer to that question is obvious….those stocks of oil producers with a high leverage to oil are going to fly.
Many of these companies have had their share prices cut in half. That means there is a chance for a very quick double if the market goes from super bearish on oil to mildly bullish again.
But Will Oil Go Back Up Again?
There are many strong arguments out there that suggest the oil price decline is not going to last very long. Here are a few reasons oil prices are going to bounce right back:
- According to an October 30, 2014 report issued by Morgan Stanley the last $10 of the oil price decline had nothing to do with supply and demand, but was instead caused by forced options trading by investment banks who needed to hedge positions. Once that forced trading is finished a quick $10 rebound in oil is possible as the true fundamentals are allowed to dictate the oil price.
- The oil market has been “spooked” by news coming out of Saudi Arabia that indicates the world’s only “swing” producer is comfortable with a couple of years of $80 oil. But what if this “news” is actually a negotiating ploy on the part of the Saudi’s to scare the other OPEC members to step in line and do their part should the cartel decide to cut production at the upcoming OPEC meeting? Any sign that OPEC is cutting production and we are back to $80 oil in a heartbeat.
- Then there is the nature of shale production. These horizontal wells by their natural start of strong and then decline at astounding rates. A well that is producing 500 barrels per day on day one will see first year declines of up to 70%. The drop in oil prices is already cutting cash flows for oil producers which means that fewer wells can be drilled. Additionally, since these wells produce a huge percentage of the oil that they will ever produce in the first 6 months after coming on stream, many oil companies will choose to reduce drilling rather than sell flush production into the current depressed oil prices. As they say, there is no better cure for low oil prices than low oil prices…..and they said that before the industry had horizontal wells that decline at these hyperbolic rates.
- The movement of the US dollar is usually mentioned in the media as a major driver of the price of oil. With the noise surrounding Saudi Arabia, the US dollar hasn’t gotten much credit for the recent move in oil prices but perhaps it should. The US Dollar Index (DXY) has surged by more than 10% in recent months to touch levels not seen in more than four years. A 10% strengthening of the US dollar could certainly impact oil prices by a similar amount. If the dollar were to give back even half of its recent gains it could create a several dollar move in oil.
If oil prices do rebound quickly, junior oil producers are the stocks that investors are going to want to own. That is why I’ve chosen this premier junior oil producer. to own for an upcoming oil price rebound.
This company has a top tier management team, industry leading netback (profit per barrel produced) and a rock solid balance sheet.
Not only do this companies offer huge leverage to an oil price rebound, but it is also the best junior oil stocks to own if lower oil prices remain for longer than expected.
Until then, it's yours to keep.
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