George Leong: Oil prices are struggling to hold above $80.00 a barrel for West Texas Intermediate (WTI) crude. Even the more widely traded Brent oil prices are hovering around the $80.00 level.
Excess supply—especially from the fracking for oil in the United States and the gush of oil that will come from the tar sands in Canada—is helping to drive oil prices lower. Then add in the slowing in Europe and China, and you have concerns on the demand side.
In Economics 101, when demand declines and supply rises, a downward pressure on prices surfaces and that is exactly what is happening to oil prices.
The oil cartel, the Organization of the Petroleum Exporting Countries (OPEC), from the Middle East has said it will not cut its oil production given the decline in oil prices. You have to wonder how valid this is, though, especially when oil prices fall to below $80.00 a barrel.
The reality is that oil prices will need to be artificially pushed higher by cutting production, as many countries in the Middle East and elsewhere require higher oil prices to break even. So it’s likely OPEC won’t have much of a choice.
Moreover, an escalation of the conflict in Syria and Iraq could also offer oil prices some support.
And oil will move higher on evidence of a recovery in the global economy.
If you believe this premise, then it’s time to look at some of the many downtrodden oil plays that have been sold off on the declining oil prices.
On the small-cap driller side, take a look at battered-down Parker Drilling Company (NYSE:PKD) out of Houston, Texas. Founded in 1934, the company develops and sells drilling solutions to the global energy sector. In its fleet are 25 land rigs and two barge rigs. Domestically, the company runs 13 barge rigs in the Gulf of Mexico and one land rig.
Parker Drilling has declined 34.50% over the past 52 weeks versus a 9.99% advance by the S&P 500, so you can see why there may be an investment opportunity here, especially if oil prices rally.
Chart courtesy of www.StockCharts.com
If you are looking for a large-cap oil play, take a look at a company like Continental Resources, Inc. (NYSE:CLR). This company has nearly one million net acres in the Bakken region, along with numerous other properties in the United States.