Last week, for the first time, the price of WTI crude oil fell below zero. This sent tremors through the oil market. Oil stocks around the world plunged in value as investors reassessed their outlook for the sector.
Over the past few days, the oil price has stabilised. However, some oil stocks continue to trade at depressed levels. This suggests there may be bargains in the market for long-term investors.
Oil stocks on offer
Oil’s price volatility has hit related stocks of all shapes and sizes over the past few weeks. Unfortunately, it’s unlikely that all of these businesses will be able to weather the storm. Many oil businesses went into the current crisis with a lot of borrowing. It’s going to be difficult for some of these companies to renegotiate lending terms with creditors, or raise new funds.
Some of these companies may also struggle to cut costs. Asset sales are another option. But I doubt these groups will be able to get good deals, especially with oil prices continuing to be weak.
Still, while some companies might struggle to survive, others could prosper over the long term.
Survivors
The sector’s most significant oil stocks, such as BP and Shell, have highly diversified operations. Both companies have large trading and refining businesses, which buy oil for processing and selling.
A lower oil price could mean lower costs for these businesses, which could translate into higher profit margins. That would offset losses in the production side of the business.
Low-cost oil producers with strong balance sheets may also be suitable investments in the current period. These businesses should be able to remain solvent until some normality returns the oil market.
Its unlikely normality will return in the near term. But with many producers on edge, over the long run, prices may surge. If the oil price crash causes a wave of bankruptcies within oil stocks, supply will fall. This could help stabilise the market in the near term as the coronavirus crisis continues to weigh on oil demand.
Supply and demand
However, when the global economy emerges from the crisis, demand should begin to increase rapidly. As it takes months or even years to restart closed oil projects, its could be some time before supply catches up with demand.
To put it another way, the current oil price crash may lead to higher oil prices in the medium to long term. That could be good news and lead to significant profits for producers still in business.
As such, now could be an excellent time to buy a selection of oil stocks at low prices. Some companies may be able to make it through the crisis and come out stronger on the other side.
As it’s impossible to tell at this stage which companies will succeed and which will fail, buying a basket of stocks may be the best way to reduce risk while profiting from the potential upside at the same time.
