After negative oil prices, are ASX oil shares a buy today?

Are ASX oil shares a buy after we saw negative crude oil prices this week?

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Early this week, the world was rocked by what seemed like an impossible situation – crude oil, also known as black gold or the lifeblood of the global economy, was trading at a price below zero. The price of West Texas Intermediate crude even got all the way down to -US$40 a barrel at one point.

Now before you start dreaming about getting paid to fill up your car, it's not as strange as it seems. We're talking about oil futures here, not the actual spot price of crude. The negative price reflects more the glut in oil supplies and storage for future supplies than anything else.

But don't get me wrong, we're in strange times and this unprecedented development makes them a little stranger.

So obviously sentiment on ASX oil shares isn't too hot today. Who wants to extract a commodity that no one wants, after all?

The ASX's largest oil producer, Woodside Petroleum Limited (ASX: WPL), is trading at its lowest share price range since 2005. Other ASX oil shares like Oil Search Limited (ASX: OSH) and Santos Ltd (ASX: STO) are in a similar boat.

But we Fools like to be a lil' bit contrarian and go against 'the crowd' from time to time when the long-term prospects demand it.

And in this case, it's worth looking into to be sure.

Are ASX oil shares black gold?

We still do need oil.

We'll need it even more when the economy emerges from the coronavirus lockdowns we are currently enduring.

Oil powers our cars and trucks, builds our roads and makes the plastics we use in everyday life (whether this is sustainable is a topic for another day).

But here's the thing. Oil is a commodity. It sits below the ground and doesn't belong to anyone until it is pumped up and sold. It takes a lot of money to do this, which is why oil companies are typically some of the most debt-laden businesses out there.

And when the oil price is low, a brutal Darwinian game of survival of the fittest starts taking place. High-cost companies will default if the cost of production remains higher than the oil price for a long period of time.

And we have absolutely no idea how long oil prices will stay close to zero. I'd wager that downward pressures will remain for a few months yet, if not a few years due to the state of the global economy.

Foolish takeaway

There might be some opportunities for ASX oil companies out there, but I think it's a high-risk industry at the moment, and so I'm staying away. If you're intent on finding a bargain in oil, I would recommend looking at companies' costs of extraction and their debt levels as a starter.

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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