Has Oil Finally Bottomed?

According to a Bloomberg report quoting the International Energy Agency, oil prices have finally bottomed. And if you believe them, it’s time to pile back into oil stocks that have been hard hit over the past couple of years.

Their assumptions are based on crude prices showing relatively solid support just shy of $40 per barrel. The IEA says a combination of events have shored up prices:

  1. Lower than expected Iranian oil output following its re-entry into world markets;
  2. A tentative production “freeze” at current levels between Russia and Saudi Arabia; and
  3. Growing numbers of shale producer bankruptcies, which is forcing lower domestic production.

But investors should remain cautious about trusting pronouncements from “oil experts,” whose accuracy remains questionable. The chart below illustrates five previous calls of a bottom in oil since mid-2014.

chart01

In each case, the call was premature – by a wide margin, too.

So, are the experts are wrong again?

The answer, of course, is nobody knows.

What we can say is that market timing is a fool’s game. Investing success comes from making long-term decisions about a specific investment thesis – not making bets about market tops or bottoms.

We remain bullish on oil companies over the long term. If you have a longer-term perspective, many oil stocks are bargains at current prices. But until the price of oil solidifies, you will want to stick to the major players, like ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX), and ConocoPhillips (NYSE: COP). These businesses are diversified and cash-rich enough to weather additional downturns.

But from a safety point of view, clear evidence of a real bottom in oil prices is required before risks to smaller oil plays are mitigated enough to justify the exposure.

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