The good news is that oil prices are getting lower. The bad news is that oil prices are getting lower. Low oil prices can often act like falling knives. Trying to time them and catch them can be very painful. Crude oil sits at $80 a barrel, down by over 20% in the last four months. The stock prices of many of oil and gas companies have fallen even further, giving value-seeking investors a potentially fertile hunting ground for undervalued opportunities. On the other hand, investing in oil can be a very slick exercise -- no pun intended.
High-quality oil drillers like Ensco (ESV), Noble (NE), and Rowan (RDC) continue to see their share prices being slowly chipped at by a pessimistic Mr. Market. The dividend for ESV today is 8%. This is a screaming signal that a patient investment today will pay off very well -- or that the dividend is moments away from being cut. Even big oil is now starting to sell off, with names like Chevron (CVX) and BP (BP) starting to also yield above-average dividends.
But if oil keeps failing, as many analysts believe it will do in the short-run, today's prices could get quite lower.
On the other hand, low energy prices create more discretionary income for Americans because they will spend less at the pump. That could mean more spending at restaurants, retailers, and other discretionary activities, leading to enhanced earnings in discretionary sectors, making investment opportunities in those areas appealing.
Oil, however, is perhaps the most global and political commodity. In other words, the price of oil, whether low or high, tends to create repercussions all over the world. While low oil prices may be a relief in the U.S., they are causing havoc in places like Venezuela and Russia -- two countries not really known for their political stability. In fact, Russia is already suggesting theories that oil-producing countries are conspiring to keep prices low in order to punish the country for its recent political activities.
Politics aside, expect the oil price to be a headline grabber going forward at this point. At $80 a barrel, the price is getting closer to a breakeven point for even the biggest of oil producers. At some point, market forces will kick in and production will be curtailed if prices get low enough. Prices would have to likely drop below $70 to get to that point. To me, that may perhaps be the best signal that it's time to invest seriously in energy.