Why Is Oil Inching Lower Yet Again?

Despite oil’s latest pullback Cresent Point Energy Corp. (TSX:CPG)(NYSE:CPG) remains an attractive means of playing higher oil.

| More on:

Despite the oil bulls claiming that US$100 a barrel crude was on the way, prices have pulled back as the spectre of a marked step-up in global supply arises once again.

You see, Saudi Arabia (thought to have spare capacity of up to two million barrels daily) has offered extra crude to existing export customers. Then there are Trump’s plans to tap into the U.S. Strategic Petroleum Reserve as domestic political pressures over rising gasoline prices intensify. While it is highly unlikely that crude will fall to the lows witnessed in 2016, when it plunged to under US$30 a barrel, it is also unlikely to soar into triple figures, as some industry insiders and analysts have claimed. 

Now what?

Already Moscow has flagged that oil will collapse once again, while Riyadh has seized the opportunity to use its pre-eminent position in OPEC and massive spare productive capacity to manage prices. Earlier this year, the speculation was that the sweet spot for Saudi Arabia and many OPEC members is around US$80 a barrel, as the oil dependent budgets break even at that price.

Riyadh has publicly stated that the kingdom’s break-even price is US$74.40 for 2018, which is a significant decrease compared to US$106 per barrel in 2014. This can be attributed to the significant fiscal reforms made by Saudi Arabia since the price of crude weakened sharply at the end of 2014. Economists and analysts speculate that Saudi Arabia’s break-even price will be below US$55 a barrel by 2021.

Trump is also pressuring OPEC to bolster production, which culminated in an agreement between Saudi Arabia and Russia to add one million barrels daily back onto global supply.

Prices are also retreating after announcements from the Trump administration that it plans to release anywhere from 5 million to 30 million barrels from the strategic reserve to make up for supply constraints elsewhere and cool prices.

While these events will weigh on oil, there are still plenty of factors supporting higher prices. These include OPEC supply constraints, notably in Venezuela and Libya, bottlenecks in the Permian Basin that are preventing shale oil from expanding at the expected rapid rate and Trump’s plans to choke Iranian oil exports. 

So what?

What this means is that the outlook for crude will remain volatile for some time and likely won’t rally into triple figures by the end of 2018. That doesn’t mean that investors should refrain from investing in the energy patch, however. There are plenty of attractively valued drillers, which because of the efficiencies introduced at the peak of the oil slump, are free cash flow positive with West Texas Intermediate (WTI) at US$55 per barrel.

Upstream oil producer Crescent Point Energy Corp. (TSX:CPG)(NYSE:CPG) estimates that its break-even price per barrel of oil produced will be US$40. Amid an operating environment that sees WTI hovering at around US$70 per barrel, Crescent Point Energy’s operations are highly profitable.

The driller expects to be free cash flow positive with WTI at US$55 per barrel, further indicating that its earnings will receive a healthy bump in an operating environment in which WTI has averaged around US$65 a barrel since the start of the year. Those characteristics in combination with the fact that Crescent Point has lagged behind WTI since the start of 2018 make it an attractive investment in the current market.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Matt Smith has no position in any stocks mentioned.

More on Energy Stocks

sources of renewable energy
Energy Stocks

Canadian Renewable Energy Stocks to Buy Now

Renewable companies in Canada are currently struggling through a challenging phase, but quite a few of them are still worth…

Read more »

oil pump jack under night sky
Energy Stocks

Is CNQ Stock a Buy, Sell, or Hold for 2025?

CNQ stock is down in recent months. Is a rebound on the way next year?

Read more »

a person looks out a window into a cityscape
Energy Stocks

2 No-Brainer Energy Stocks to Buy With $500 Right Now

Two low-priced energy stocks can reward investors who have limited capital with far superior returns than expensive peers.

Read more »

canadian energy oil
Energy Stocks

Where Will Suncor Stock Be in 1 Year?

Suncor Energy Inc (TSX:SU) stock is doing well this year. Will it still be doing well next year?

Read more »

A worker overlooks an oil refinery plant.
Energy Stocks

Best Stock to Buy Right Now: Cenovus vs Baytex?

It may not seem like a good time to buy most energy stocks, but there are always exceptions.

Read more »

A bull and bear face off.
Energy Stocks

Dividend Investors: Top Canadian Energy Stocks for November

These three dividend-payers are on a bullish uptrend.

Read more »

analyze data
Energy Stocks

Buy 8,850 Shares of This Top Dividend Stock for $2,000/Month in Passive Income

Let's do the math on what it would take to generate $2,000 a month in passive income from Enbridge (TSX:ENB)…

Read more »

oil and gas pipeline
Energy Stocks

Is TC Energy Stock a Good Buy?

TC Energy stock has a lot going for it, but there are also a few red flags to consider before…

Read more »