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When to Buy Oil Stocks

Oil prices have been on a five month slide. Nymex crude hit $64.74 which is the lowest in five years. The last time oil was priced this low was the depth of the great recession. The US oil fracking boom is partly to blame as there is glut of oil in North America. But, in addition, OPEC is not cutting back on production, which is what the cartel usually does to prop up prices. As a result oil stocks have taken a beating. Is this when to buy energy stocks? One would usually expect to see investors picking up great deals at this point but that is not the case. As an article in the Wall Street Journal notes, energy stocks have few buyers even at bargain basement prices.

Energy stocks are on sale following a five-month plunge in crude oil, but so far few investors are heeding the temptation to bargain-hunt.

Portfolio managers and analysts covering the sector are bracing for a wave of dividend cuts, share-repurchase delays and capital-spending reductions that will likely ripple across an industry reeling from the 38% tumble in U.S. crude futures since June. Distressed-debt investors are circling a handful of deeply indebted U.S. shale-oil producers that are deemed unlikely to survive further oil-price declines without mergers or overhauls.

It would appear that perhaps too many companies in the energy sector were too highly leveraged and are in trouble due to falling prices. And, it may well be that prices will continue to fall. When to buy oil stocks is when the price of crude bottoms out but that is not yet the case.

Factors That May Signal a Turnaround

Oil prices respond to the laws of supply and demand. Supply is high with the US fracking boom and OPEC refusing to cut back. Demand may we weakening. The Chinese economy is slowing and that means less need for raw materials and energy. When to buy oil stocks is probably not when there is still the risk of another recession in Europe and a slowdown in China. When to buy oil stocks will be when OPEC signals a cutback and when North America, Europe and China are all well on their way out of a recession.

Not Just Oil Stocks

It is not just oil stocks that are hurt when signals of economic weakness come out of the USA, Europe or China. World stocks and not just oil are down due to weak Chinese economic data and even news of a weaker than expected start to the North American holiday shopping season.

CHINA FACTORIES: A survey by HSBC Corp. showed Chinese manufacturing activity weakened in November, adding to signs an economic slowdown is deepening. HSBC said its purchasing managers’ index declined to 50.0 from the previous month’s 50.4 on a 100-point scale on which numbers below 50 show activity contracting. The bank said domestic demand was sluggish and new orders were weak. China’s economic growth slowed to a five-year low of 7.3 percent in the latest quarter.

BLACK FRIDAY: Early discounting, more online shopping and a mixed economy meant fewer people shopped over Thanksgiving weekend, the National Retail Federation said Sunday. Overall, 133.7 million people shopped in stores and online over the four-day weekend, down 5.2 percent from last year, according to a survey of 4,631 people. Total spending for the weekend is expected to fall 11 percent to $50.9 billion from an estimated $57.4 billion last year.

Oil stocks weaken with the economy and rise with good economic news. When to buy oil stocks will be when the news is better.

Picking Bargains

If weak oil prices persist we can expect to see mergers and acquisitions in the oil sector. An early example is the purchase of Baker Hughes by Halliburton.

Halliburton (HAL) said Monday it will spend $34.6 billion to acquire Baker Hughes (BHI). The deal between the second- and third-largest companies in the industry would form an energy giant with more than 136,000 employees.

The best placed investors to pick up deals when the time comes to buy oil stocks are those already in the energy sector.

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