Commodity investing is a little different to owning companies like banks, retailers, healthcare stocks and so on.
Commodity companies can make investors a lot more money if investors can pick undervalued stocks when commodity prices are rising.
It's not hard to argue that oil stocks are cheap at the moment, particularly medium-sized and smaller companies like Beach Energy Ltd (ASX: BPT) and Senex Energy Ltd (ASX: SXY) which have crashed nearly 50% in recent months.
Even giants like Woodside Petroleum Limited (ASX: WPL) and Santos Ltd (ASX: STO) look cheap, with Woodside in particular trading at a very appealing P/E and offering a great dividend.
The key determinant of their 'value' however is just one factor – the price of oil, which has fallen more than 20% since June.
While many Australian producers have highly competitive costs that will insulate them from prices of $70 or below, falling prices do hurt revenues and more importantly hurt share prices, which can offer some great bargains to investors.
However investors need to be aware of the potential for oil to do an 'iron ore' and have its price crushed by massive oversupply.
Today's meeting of the Organisation of Petroleum Exporting Companies (OPEC) will in part set the stage for the short-term future of oil prices.
I've written in depth about OPEC recently, and while I believe ultimately low prices are hurting its host nations more than Western oil producers, recent comments lead me to believe that today's meeting will not lead to a cut in oil production.
A comment from Saudi Arabia's oil representative indicating the market 'will stabilise itself eventually' says to me that OPEC may be expecting higher-prices to return to the market.
As basic economics tells us, with an oversupplied market the most effective way to support prices is either reduce supply, or increase demand.
An OPEC playing hardball could be very bad news for Australian oil producers – it's also worth pointing out that the long-term average price of oil is substantially below $100 a barrel which could see us entering a 'new normal' (actually returning to the old one) in the oil market.
Nevertheless, I continue to believe a number of ASX producers look appealing at current prices, with Beach, Senex and Woodside remaining my favourites.
I will however be waiting to see which way OPEC swings before making a decision as continued high production could lead to even bigger bargains.
