Overreaction to Sinking Oil Prices Creates Opportunities

Surging crude oil supply, weakening demand, and the strengthening U.S. dollar resulted in a 13% drop in global crude oil prices in the past month - and energy companies fell too

Morningstar Equity Analysts 22 October, 2014 | 10:14AM
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Crude oil prices are down sharply in recent weeks, and with them, energy stocks. We understand the crude market’s reaction to worsening short-term fundamentals, but feel that equity markets have over-reacted, misinterpreting how lower prices will affect cash flows for oil and gas firms.

What’s driving crude prices lower is slowing demand in the face of growing U.S. tight oil production and the return of 500 mb/d of Libyan crude oil to global markets since July. Markets have known and discounted tight oil production from the U.S., which will add roughly a million barrels a day of crude oil production this year and next, but the resumption of Libyan exports has hit the market just as the International Energy Agency has been lowering oil demand forecasts for 2014 and 2015. The result is a fear of oversupply, leading to lower prices.

Surging crude oil supply, weakening demand, and the strengthening U.S. dollar resulted in a 13% drop in global crude oil prices in the past month and a 24% drop from their 2014 peak of $107/bbl, a reflection of near-term fundamentals, not longer-term supply and demand trends, in our view.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
BP PLC355.00 GBX-0.34Rating
Cenovus Energy Inc14.50 CAD0.83
Exxon Mobil Corp63.12 USD0.69Rating
MEG Energy Corp11.65 CAD3.74

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Morningstar Equity Analysts  Morningstar stock and fund analysts cover 2,000 mutual funds, 2,100 equities, and 300 exchange-traded funds.