As oil stocks continue to fall week in week out, Wall Street has begun to ask questions like: Is it time to go bargain hunting?
Well, it is true that market valuations are high amongst large oil cap stocks, but it is still too early to buy from the small players in the sector.
Crude oil is Nigeria's main source of income
Well, it is true that market valuations are high amongst large oil cap stocks, but it is still too early to buy from the small players in the sector. Not aggressively at least.
And the reason is simply because the correction in the market is yet to run its full course. The wave of corporate failures and industry consolidations that usually signal a turning point are not here yet.
And there are two reasons for this. The first is, oil producers in the United States are still producing in large amount so as to compliment the falling prices and forestall any decline in corporate revenues.
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This strategy really does help forestall decline in corporate revenues but also prolongs the oil price declines and precipitation.
Secondly, a super low interest environment has helped a lot of inefficient oil producers stay afloat and slightly relevant in the industry. The problem with this is that these rates won’t stay low forever. Not in the US at least. And we all know almost everything that happens in the US affects the rest of the world.
However, higher interest rates also mean a string dollar which will put US oil producers at a competitive disadvantage over their overseas peers.
And it may push oil producers that are still marginal in the industry out of it, thereby signaling a turning point in the industry and in the market.
That’s the time to strike.
