1 Thing To Know About Oil Now

With the price of oil price down by over 60% from more than US$100 per barrel in mid-2014 to less than US$40 today, investors in the oil and gas industry have likely lost a sizable percentage of their capital thus far.

Since the start of 2015, the 54 oil & gas stocks that were listed in Singapore’s stock market as of November 2014 have lost an average of 44% of their shares’ value based on last Friday’s close. Even bigwigs in the industry like Keppel Corporation Limited (SGX: BN4) and Sembcorp Marine Ltd (SGX: S51) have not been spared from the carnage – their shares have plunged by 38% and 51%, respectively, over the same timeframe.

These share price declines have taken place on the back of a drastic weakening of the businesses of the 54 companies. According to data from S&P Global Market Intelligence, at the start of the 2015, this group of shares had made a collective S$3.66 billion in profit; last Friday, the self-same figure was a loss of S$312 million.

Any change in fortune for the businesses of oil & gas companies can’t happen without an increase in the price of oil. Rising oil prices is what can stimulate oil production and capital investment projects in that area.

And, the good news that investors in oil & gas stocks have been waiting for might just be around the corner. Here are some excerpts from a recent Wall Street Journal article:

A “critical mass” of oil-producing countries have agreed to freeze oil production, Russia’s energy minister said Tuesday, as African, Latin American and Persian Gulf producers expressed optimism about joining the deal…

… the aim [of the production freeze] was to stabilize the price of oil around [US]$50-[US]$60 per barrel, as any higher price would again create excess supply.”

What the quote above means is that oil production levels may be kept at current levels. That’s good news, given that oil producers are not planning to raise production levels further and depress the price of the commodity.

But does that mean that the price of oil is sure to rise to around US$50 or US$60 per barrel and that investors should rush out to buy battered oil and gas companies right now?

Here’s how I’m looking at the information.

At the current price of less than US$40 per barrel, it’s impossible for most oil producers to make money, given that the estimated cost of production per barrel of oil is much higher than that. In fact, only a handful of low cost producers in the Middle East can still make money at US$30 per barrel.

Therefore, unless there is a big improvement in technology which can lower the cost of oil production to below US$30 per barrel, the supply of oil should eventually fall as high-cost producers stop pumping oil, leading to lower production and thus a higher price of oil. What this means is, a reversal in the price of oil will most likely take place eventually – perhaps even without the freeze in production levels – and the most relevant question investors should ask themselves is when it will happen.

A Foolish conclusion

Do I have an answer for when it’d happen? Unfortunately, the answer’s no.

Given the complexities involved in predicting the prices of commodities, what investors may want to do instead is to stick with finding good companies that (1) are available at a reasonable price and (2) are likely to have businesses that can perform well in the long-run. Not every oil and gas company in Singapore’s stock market fit both criteria currently, so a careful search is needed, even if prices for most oil & gas stocks here have been pummelled.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.