For those that follow energy markets it is often easy to lose sight of the timescale off which the major companies in the sector make their decisions. We tend to follow the daily gyrations of oil and natural gas and base our decisions on those movements. Large, integrated, multi-national firms, on the other hand, have learned that most of the time those short-term moves are irrelevant, and base their decisions on their outlook for decades ahead. That means that while energy stocks of all kinds respond to short-term moves in the price of oil, drops in stocks whose business is long-term in response to a drop in oil can often represent an opportunity.
We saw just such a drop this week. The news that Saudi Arabia had ramped up their production by more than generally expected and a lessening of short-term supply worries caused crude to collapse on Wednesday, posting the biggest one-day decline in two years. Energy stocks reacted as you would expect, and in many cases that sets up an opportunity to buy at a discount. The best opportunity there is in oilfield services, where the longer-term outlook combined with historical price action suggests that business will not be hit hard, even if, as I expect, crude continues to move lower in the immediate future.
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Even just a quick glance at the one-year chart for WTI futures above puts Wednesday’s fall in perspective. Crude has been on a sustained upward run and in many ways a correction,…