Long-term fool.com.au readers will know that I have a soft spot for speculating on commodity stocks, including my spectacularly ill-timed purchase of Senex Energy Ltd (ASX: SXY) 13 months ago – now down 71%.
I also have an interest in politics, and since the price of oil depends on more than just economics, I keep a close eye on this commodity. Two factors have caught my eye recently and they make me wonder if oil could in fact be reaching its bottom.
First, the US oil rig count has declined 62% from 1,609 rigs last October, to 605 currently, according to the Wall Street Journal. Unfortunately output is still meaningfully higher than last year, although it should trend downwards as exploration budgets have been slashed to the bone and company finances are under pressure.
Second, Bloomberg reported that Saudi Arabia – the world's largest oil producer and kind-of leader of oil cartel OPEC – has experienced a sharp decline in its US$720bn foreign reserves as the oil prices plummeted.
I estimated a year ago that the fall in oil prices was costing OPEC over US$3bn a day in missed revenue, and according to an analyst quoted by Bloomberg, Saudi Arabia is facing a massive 14.5% budget shortfall this year. While Saudi Arabia could fund its deficit for a long time from its currency reserves, financial pressure is starting to build.
So, is it time to buy oil and gas stocks yet?
Woodside Petroleum Limited (ASX: WPL) shares have declined 15% in the past year, while Santos Ltd (ASX: STO), Oil Search Limited (ASX: OSH), and Origin Energy Ltd (ASX: ORG) are down 53%, 8%, and 49% respectively.
Certainly all four stocks have felt the pain, with Origin Energy and Santos particularly suffering as a result of the high debt they took on to fund their massive LNG projects.
However, I don't yet feel that the time is ripe for a re-entry into the sector. While the above two indicators are promising and among the first (albeit faint) positive indicators I have seen, elsewhere in the world brings problems.
Russia is ramping up its oil production, because the weak Ruble makes sales denominated in US dollars incredibly appealing, while Iran is also set to re-commence selling oil on the international stage as/if commercial sanctions against it are lifted.
With both of these factors in mind, the current oil glut could in fact continue to get worse before it gets better.
