Oil has been headed down, or at least our domestic benchmark has shown continuing weakness over the last five days. Our investment philosophy has been to concentrate on the domestic E+P players since the spring and we’ve done fantastically well by loading up on mid-cap E+P names like EOG Resources (EOG), Noble (NBL) and Cimarex (XEC). But what should we be doing now?
It’s first important to understand why oil has dipped. There has been, of course, a lessening of geopolitical risk with the Syria chemical weapons agreement and the overtures of sanctions ending from the government of Iran. But here in the US, an increasing supply of crude from the shale plays in the Bakken and Eagle Ford has also combined with a group of maintenance shutdowns of refineries on the Gulf coast, expanding the surplus of supply in Cushing, Oklahoma.
It has been the highest beta E+P names that have been hit in this downturn, but I don’t think it will be a long one. My thesis on oil has been mostly unchanged in the last 5 years – it will continue to make higher lows, with the upside limited only by geopolitical tensions. Have a look at this chart I made up last month:
It indicates to me that these downdrafts are unpredictable but also short-lived – with the upward triangle formation I’ve sketched, you’ll likely see prices in the low 90’s before a recovery begins.