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The Bottom Of The Oil Cycle Is The Ideal Time To Fill Up On BP plc And Royal Dutch Shell Plc

Have we reached the bottom of the oil cycle? Maybe not yet. Goldman Sachs reckons there is lower to go, despite black gold recently hitting a seven-week high.

It expects oil to stay low for another three months, trading at around $40 a barrel, down from today’s $55.

Management at Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) is evidently calculating that we are pretty near the bottom, however.

Its £47bn cash-and-shares offer for BG Group looks like an attempt to suck up oil assets on the cheap, before the cycle moves upwards again.

If Shell reckons now is a good time to pick up oil stocks at bargain prices, maybe you should be doing likewise.

Rev Your Engines

Oil stocks have had a tough year. Shell and BP (LSE: BP) (NYSE: BP.US) are down 14% and 5% respectively over the last 12 months, against a 6% rise in the FTSE 100.

The oil price collapse has played a major role in that, although of course BP has its own problems.

Even if Goldman Sachs is correct and oil stays low through summer and beyond, now may still be a good time to start building your stake in these companies. You are never going to hit the absolute bottom of the market, but if you start buying now you should at least pepper the target.

Trash Talk

I wouldn’t recommend buying in the hope that Shell’s manoeuvre will trigger a wave of oil industry takeovers.

Personally, I don’t like buying on loose takeover talk, but that hasn’t stopped investors bidding up the price of BP in anticipation, and smaller explorers such as Ophir Energy and Tullow Oil.

World Of Worry

But other factors could kickstart the next phase of the oil cycle. US rig count is falling faster than expected, as cheap oil burns margins.

If the Obama administration does strike a deal with Iran over its nuclear programme, it will still take a year or more for the nation’s oil fields to get back to full production.

The world’s swing producer, Saudi Arabia, is politically unstable, and another flare-up in the Yemen could frazzle nerves.

And all the time the world’s population is growing, emerging markets are demanding western lifestyles, and renewables have yet to turn into green gold.

If cheap oil gets the global economy motoring again, and takes pricey production offstream, it will ultimately generate its own price recovery.

Top Up Your Tank

Few expect an immediate upswing, given record high Saudi output and US inventories, but while you wait, BP yields 5.14% and Shell, following its recent share price dip, yields 5.62%.

That is just the juice you need in a zero inflation world.

If you're tempting by these juicy yields, there are even more generous company dividends out there. The FTSE 100 is packed with top stocks paying as much as 5% or 6% a year.

To find out how dividend-paying stocks can make you rich, download the Motley Fool's FREE wealth report How To Create Dividends For Life.

This explains how reinvesting dividends for growth will generate almost half your total returns from investing in stocks and shares.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.