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By Team Ace Investors
Right Time to Invest in Low Lying Crude Oil Prices?
Since the beginning of this year, the crude oil prices have been volatile touching the level of $21.65/bbl on March 30, its lowest since 2000. Crude oil prices have fallen almost 70% since early January. Coronavirus and the price war between Saudi Arabia and Russia have contributed to the sharp drop and volatility in the price of crude oil.
In the previous years also, Crude oil was struggling as the government across the economies were pushing renewable energy but we believe that oil likely remains an important commodity/asset for many industries like power generation and distribution companies (Although the shift is going on), such as plastic, chemical companies, and many others for many years to come.
In the previous years also, Crude oil was struggling as the government across the economies were pushing renewable energy but we believe that oil likely remains an important commodity/asset for many industries like power generation and distribution companies (Although the shift is going on), such as plastic, chemical companies, and many others for many years to come.
The Fall is Different This Time!!
In the normal scenario, such low prices must have benefited the importing nations like Asia and central Europe are also not able to gain from lower oil prices this time because of the collapse in demand caused by COVID-19 and major producers in the Middle East, northern Europe, and America to struggle. But it’s not happening!
The impact is across the sector.
In the current scenario, energy companies across the upstream, midstream and downstream segments, are struggling. Their whole business depends on the movement of crude oil. The global lockdown because of coronavirus has halted all business activities across sectors and across the world due to which oil marketing companies/downstream companies are not able to take advantage of such low oil prices and the oil producers are struggling with capacity and storage issue.
The pipeline and storage facility providing companies are finding it difficult to store the crude output. In this negative scenario, the companies operating with high debt on their balance sheet and operating with high costs are the most sufferer in this scenario.
This time oil prices are being beaten from both sides, supply, and demand.
Short Term Volatility to Stay
Over the last week, the crude oil prices have rebounded from the lows and reached $31.93 per barrel. The oil prices have shown some strength after as OPEC gets set to discuss an output cut. OPEC and its allies would strike a deal to cut crude supply worldwide by at least 10 million barrels per day (BPD). The OPEC has a scheduled meeting on April 10.
But we believe that the oil prices are likely to show some volatility due to the uncertainty related to the duration of coronavirus and the widespread shutdown hampering the demand across the world. Most importantly how the global economic respond after this.
Will Oil Prices Once Again Touch $50-$60 per barrel levels?
We believe that it's highly unlikely that the current conditions in the oil will persist for very long. The oil prices will once again, go back to its levels. The current situation can be an opportunity for the investors rather than a cause for panic. The crude oil price has dropped to a level that we have not seen in the recent past. It is the time to choose logical reasoning rather than emotions playing their part. We wrote on Behavioural Bias Impacting Investor’s Portfolio sometimes back.
In our opinion, it is a good time to build some exposure to oil. Investors can consider several stocks with strong fundamentals, operating with healthy balance sheets, ranging from unleveraged to moderate leverage. The stocks in the oil and gas sector now trading at massive discounts to their prices only a couple of months ago.
Panic could prove to be one of the best times to invest and build positions in high-quality companies impacted by short-term fear. Stocks like Woodside Petroleum, Santos, Beach Energy, Oil Search and many others are looking so attractive at current price.
All these stocks have shown a correction of 30-40%. Investors can benefit from this crisis by investing in companies with operating with a strong balance sheet and cash flows.
Given the massive sell- off, we believe that the price is likely to experience an upward trajectory and is currently available at risk- free level. It has the potential of going up rather than falling from the current level. We believe that once the COVID-19 cases begin to reduce and the industries start their production, the demand for crude will increase and prices will again go up.