Why it could be time to invest in oil companies again

The time to buy tulip bulbs is when they’re dull blobs, not when the flowers sprout in spring. Investors would be wise to take a page from the gardener’s handbook. As much as we want to buy things when they are most attractive, the best investments are usually the ones covered in dirt.

For the past two years, energy stocks have looked quite dirty, as the price of oil sank to a latter-day low of US$27 a barrel in February. At that price, most Canadian producers can’t cover their operating costs, let alone fund the effort to replace their reserves. But as oil prices firm up around the US$50 mark, investor anxiety is abating. Industry fundamentals are clearly improving: American production is down, consumption is up and supply and demand are inching toward a balance. And since there’s been so little investment in the sector for two years, there’s a high possibility of demand exceeding output in the future. That presents an enticing prospect for companies that maintained or increased production through the crash.

Just be wary of basing your investment decisions purely on the direction of oil prices. Crude may have stabilized, but few see it staying that way. Expect higher highs and lower lows than we grew used to in the years leading up to 2014, says Greg Pardy, an analyst with RBC Capital Markets. You need only look at the growing dysfunction within OPEC, which weakened that organization’s influence over global oil prices, to see evidence of that. “Turbulence is going to be the watchword,” Pardy warns. “Don’t just take a punt on the oil price, because the path of recovery is going to have its ups and downs.”

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