The 3 Biggest Reasons Why Oil Could Crash Further
There’s no denying that the oil rout has been devastating for the energy sector. That being the case, there seems to be a belief prices will come roaring back.
If you don’t believe me, look at the stock prices of companies like Suncor Energy Inc. (TSX:SU)(NYSE:SU) and Crescent Point Energy Inc. (TSX:CPG)(NYSE:CPG). Since the beginning of 2014, Suncor’s share price has actually increased, even though oil prices have halved during this time.
Crescent Point’s stock price has decreased over this time, but its shares trade at a premium to the company’s net asset value, even assuming a robust oil recovery.
So, investors seem fairly optimistic. Is this optimism warranted? Well, I would argue there’s just as much risk to the downside. Below are three reasons why.
On Thursday Iran reached a framework agreement with the international community, one that will gradually eliminate sanctions against the country. As a result, Iran will be able to export more of its oil. Over time, this could add an extra one million barrels per day to the oil supply.
To put this in perspective, today the oil market is oversupplied by about 1.5 million barrels. So, a fully productive Iran is the last thing oil companies like Suncor need.
2. Lower costs in the United States
Canadian oil executives, including those at Suncor and Crescent Point, like to talk about reducing costs. Ideally, these reduced costs will allow the companies to survive during this temporary price slump. Then when prices recover, profitability will be higher than ever.
There’s a big problem with this narrative: American companies are reducing costs as well. To illustrate, Continental Resources Inc. expects its well costs to decrease by 15%, which is not unreasonable in this environment. If this happens, its Bakken wells will return 10-20% with oil in the US$40s.
So, if you’re waiting for oil production to fall off a cliff in the United States, you may have to wait for a while.
Thanks to this surge in production, more and more oil is being diverted to storage tanks. This is actually helping to sustain demand. Unfortunately, storage capacity is running low. If it runs out, then all newly produced oil will have to be dumped on the market. This would surely send prices crashing further.
So, when could this happen? Estimates vary, but Kevin O’Leary said that he expects this to happen around August. Others have called for capacity to run out even sooner.
Here’s the most important point: if you’re thinking that oil companies’ stock prices can’t get any lower, you’re wrong.
Oil companies may not recover for years, but this company has already started.
When tech companies fall from grace like this Canadian icon did, it's typically impossible to regain relevance. Here at Motley Fool Canada, we think this company and its CEO are prepared to prove all of the doubters wrong. We have even named it one TOP turnaround stock for 2015. Will you be left on the outside looking in should our intuition come to fruition?
If you're a curious soul (like me), then you can download the name, ticker symbol, and price guidance absolutely FREE.
NEW! 1 TOP STOCK FOR 2016 AND BEYOND...
Let’s not beat around the bush – energy companies performed miserably in 2015. Yet, even though the carnage was widespread, not all energy-related businesses were equally affected.
We've identified an energy company we think offers one of the best growth opportunities around. While this company is largely tied to the production of natural gas, it doesn't actually produce the gas. Instead, it provides the equipment required to get natural gas from the ground to the end user. With diversified operations around the globe, we think it's a rare find in the industry.
We like it so much, we’ve named it as 1 Top Stock for 2016 and Beyond. To find out why, simply enter your email address below to claim your FREE copy of this brand new report, "1 Top Stock for 2016 and Beyond"!
Fool contributor Benjamin Sinclair has no position in any stocks mentioned.
There?s no denying that the oil rout has been devastating for the energy sector. That being the case, there seems to be a belief prices will come roaring back.
If you don?t believe me, look at the stock prices of companies like Suncor Energy Inc. (TSX:SU)(NYSE:SU) and Crescent Point Energy Inc. (TSX:CPG)(NYSE:CPG). Since the beginning of 2014, Suncor?s share price has actually increased, even though oil prices have halved during this time.
Crescent Point?s stock price has decreased over this time, but its shares trade at a premium to the company?s net asset value, even assuming a robust oil recovery.