Here are the energy components of the S&P 500:
Here are the smaller Exploration and Production companies:
Buying oil stocks at these prices is just spilling money
6 reasons why the energy sector is no bargain
About a month ago, some traders were trumpeting that the worst was over for oil. Prices normalized around $60 after a snap-back in spring, with energy seemingly on solid footing once more as we neared the end of the second quarter.
In July, though, all bets were off as crude tumbled sharply to near six-month lows, shedding about 20% in a matter of weeks. That once again puts oil prices within spitting distance of their 2009 lows.
It may be tempting to think you can find a bargain in oil stocks on this pullback, or even that you can play the supposed rebound in crude via commodity futures or related exchange-traded products.
But the pain in oil is far from over, and energy stocks are no bargain.
1. The U.S. is a major oil producer: Supply gluts persist despite the recent cutbacks in domestic oil production. Consider that, according to the U.S. Energy Information Administration, U.S. crude oil production will average 9.5 million barrels a day in 2015 — up significantly from 8.7 million in 2014. And while cutbacks will drop that output to 9.3 million barrels daily in 2016, according to EIA projections, that’s still well above 2014 levels.
2. Oil is abundant worldwide: OPEC has refused to curtail production despite low prices and increased supplies from the U.S. That’s partially because of nations including Saudi Arabia that want to punish U.S. shale oil companies, which are now competitors in a big way on the global stage, but also because OPEC really has no other options but to keep pumping.
Member states of the cartel need revenue to fund their governments, so cheap oil paradoxically requires nations to sell more in such an environment to make budgets work. Furthermore, a serious change in production would validate fears that the global energy markets are no longer in their control — an idea that Middle East plutocrats cannot allow their citizenry to entertain. That all adds up to record global crude inventories in May (the latest data) that covered roughly 31 days of forward demand — even if another drop of oil isn’t taken out of the ground....MORE