An endangered line of analysis among financial types is how long it will take for oil to jump back above $100 a barrel.
These days, getting—and staying—above $50 a barrel would likely be considered a significant accomplishment.
Of course, oil prices have rebounded since plunging to a multi-year low of under $40 a barrel, last month begging the question of whether a bottom in the market has been set—and whether this is a time for investors to consider buying or building positions in energy stocks.
Oil market skeptics point to the still-present problem that has contributed to the decline in prices: In the face of falling prices and unchanged-if-not-smaller demand, worldwide production has not significantly diminished.
For oil bears, even the recent rally in energy stocks is an entirely explainable phenomenon: Hedge funds last month ramped up short positions in oil futures to the highest levels since March, according to data from the U.S. Commodity Futures Trading Commission. This exacerbated oil’s spike as funds scrambled to get out of trades.1
On the other hand, the mid-August plunge to a 6.5-year historic low in oil prices has brought out those who believe a buying opportunity is at hand. Most notably perhaps, Citigroup late last month issued its first bullish report on the energy sector in four years.
At the time, the sector was trading at a 1.2 times price-to-book ratio, which was below the trough valuations in the first quarter of 2009 and fourth quarter of 1998, periods when crude prices also collapsed, the Citigroup report noted.2
“The oil market is oversupplied, pushing prices close to effective cash costs. But prices cannot stay at cash costs forever,” Citigroup Managing Director Analyst Alastair Syme wrote. “Some risk that the market is yet to reach bottom again, we think that risk against the backdrop of where Big Oil equity valuations are, is a risk that is beginning to be worth taking.”
When the industry does drive profitability back to midcycle levels—as it did during the industry’s down-cycles in the mid-1980s and late 1990s—the sector can trade to a fair value of 1.75 times book, which represents a 45 percent price upside from here, wrote Syme.
The Energy Takeout Targets motif intends to capture some of this upside, specifically signs that that mergers and acquisitions among energy companies appear likely to continue at a steady clip. Low oil prices continue to crimp the revenues of small energy companies that have characteristics in common with recent acquisition targets in the industry.
While the motif has dropped 36.2 percent since creation June 6, 2015 and still shows a 4.7 percent decline over the most recent 30-day period, it actually gained 1.2 percent over the first nine days in September.
Of course, nine days hardly qualifies as a trend, and analyst reports on the energy sector seem to show varied opinions about whether the time might be right to buy at a low. If anything, the next best thing might be to simply watch and wait for a more clearly defined pattern.
Investments in commodity-related products, such as precious metals, agricultural products, and oil may be subject to greater volatility and liquidity risks than investments in traditional securities. Commodity-related products can be significantly impacted by underlying commodity prices, world events, government regulations, and economic conditions, which can dramatically affect the value of an investment.
1 Thomas, Helen, “Why the Oil Rout Isn’t Over,” The Wall Street Journal, September 7, 2015.
2 Tae Kim, Tae, “Bearish for 5 years, Citi Says Buy Energy Stocks,” CNBC, August. 18, 2015.