Near-term prospects look grim for oil stocks

Fundamentals point to further oil-price reductions.

Kirk Paulus 30 March, 2015 | 5:00PM
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It's difficult to find a compelling argument to invest in the oil sector when so many underlying fundamentals are pointing to further oil-price reductions. Oil will once again have its day, but it will take time for the stock market to adapt to the new price dynamic.

Driving the deteriorating fundamentals for oil stocks is a worldwide oil glut, exacerbated by the decision by Saudi Arabia to maintain production and allow prices to plunge. The Saudis are unlikely to change course, since low oil prices meet their financial and political objectives.

Above all, the Saudis are defending their global market share. Prices that were above or near US$100 per barrel of oil equivalent had the unintended consequence of making shale-oil production and new fracking techniques more economically feasible. This, in turn, led to a huge increase in U.S. production. Along with becoming the world's largest oil producer, the U.S. now also has the capacity to be a net exporter. Oil is flowing at such a high rate into U.S. storage facilities that they're now reaching their capacity.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Imperial Oil Ltd43.16 CAD1.55

About Author

Kirk Paulus

Kirk Paulus  Kirk Paulus is an equity data analyst with the CPMS division of Morningstar. He holds a Bachelor of Business Administration degree from the Schulich School of Business at York University. He can be reached at kirk.paulus@morningstar.com but cannot provide individual advice.

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