If you lacked any additional information other than the fact that the oil industry is known for its boom and bust cycles, you might consider investing in oil stocks during this period of cheap oil stock prices. Unless there is a fundamental decline in the demand for oil, this year might be a record opportunity to benefit from a rebound in oil stock prices, potentially making oil stocks the best investment.
1. Oil Supplies Are Shrinking
The decade-low oil prices have knocked competitors out of the field, leaving fewer market participants selling oil. Furthermore, lower oil prices are leading to declining oil exploration. Wood MacKenzie consulting firm found 68 large oil and natural gas projects across the globe that are in limbo. These projects have a value of $380 billion. Additionally, the suspended projects cut oil production by 2.9 million barrels a day.
More dwindling oil supplies are reported by RBC Capital markets. This research tallies that an additional 356,000 barrels of oil per day were either cancelled or delayed by OPEC countries last year. The study suggested that this year will continue the trend of lowering oil production. The declining supply of oil is likely to cause an increase in the price of oil — and subsequently oil stocks — this year.
2. The Pros Are Betting on Oil This Year
Shailesh Kumar of the Value Stock Guide, a value investment advice service for high-net-worth clients, recently took a position in the oil industry stocks. He discussed recent research from the International Energy Agency Oil Market Report, which stated that oil demand is expected to peak at 96.5 barrels per day during the second half of 2016.
With the current supply at approximately 97 million barrels per day, supply and demand will be approaching market equilibrium, which should put upward pressure on current prices.
3. OPEC Countries Are Feeling the Pain of Low Oil Prices
OPEC countries and non-OPEC countries alike are being hurt by low oil prices. Shailesh explained that the OPEC countries were hoping to get U.S. shale producers to cut back, which would allow the OPEC countries to increase their market share and increase prices. This would lead to higher oil prices, profits and better oil stock performance.
4. Russia May Help Make Oil Stocks the Best Investment This Year
Russia, along with OPEC members Saudi Arabia, Venezuela and Qatar, announced a plan to freeze oil production at current levels this year, according to The New York Times. “Even a small reduction in production can deplete the oil inventory very rapidly so the prices can ramp up very quickly if an agreement to cut production is reached,” said Shailesh.
This should lead to more inactive rigs, lower supply, decreasing oil inventories and finally higher oil prices. As the oil prices go up, so will oil stocks.
5. Demand for Gasoline Is Growing
Demand for gasoline continues to rise. This month demand is up 10.5 percent over the same period last year, according to energy expert Jay Hatfield, co-founder and president of InfraCap, the company behind AMZA, an energy master limited partnership (MLP).
He continues to forecast gasoline demand to increase over 700,000 barrels per day. This growing demand, combined with declining U.S. oil production is likely to lead to increased profits and higher oil stock prices.
6. The U.S. Is Allowed to Export Oil
The U.S. recently lifted a 40-year ban on U.S. crude exports, according to The Wall Street Journal. If all goes as planned, this opportunity could eventually grow the demand for U.S. oil and further boost oil stock prices. If U.S. producers broaden their customer base, there’s a strong likelihood of higher profits leading to increased oil stock performance.