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Why Appearances Can Be Deceiving In European Oil Markets

When markets in general or particular sectors come under pressure, those of us of a contrarian bent start looking around for bargains. Oil company stocks and European stocks have both been under enormous pressure recently, so many are looking at European oil stocks as particularly cheap. That is only natural and is generally a good investing strategy, but some degree of care is called for. Sometimes a cigar is just a cigar and sometimes stocks that have dropped have done so for good reason.

To demonstrate that point, let’s take a look at two large European diversified oil companies, Total S.A. (TOT: ADR) and Royal Dutch Shell (RDSA: ADR). Both have lost significant ground over the last few months. TOT is down over 21 percent from its June 24th high while RDSA has lost 13 percent since it peaked on July 2nd. It is tempting, then to conclude that Total, having been harder hit, has more upside should a bounce back occur. I actually heard an analyst on CNBC the other day saying just that. His logic was that large multinational oil companies, regardless of where they are headquartered, are historically undervalued, and the cheaper the better.

That is, as I say, tempting; unfortunately it is also wrong. Total is likely to stay mired for some time, while Shell has a good chance of recovering quite quickly. To understand why, we must understand the two main factors that have caused them to tumble.

First, the price of oil has fallen around 17…

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