Oil prices have been hammered lately, faced with a barrage of bearish headlines, but thats exactly why it may be time to jump into the unloved sector, according to one upbeat financial blogger.
Sovereign Man at the ValueWalk blog says now is the time to opportunistically scoop up oil-related stocks XLE, -0.12% even as crude-oil futures CLQ7, +1.52% LCOU7, +1.61% struggle to trade above the $50 level.
When I read lots of energy stories with a uniformly grim outlookits just a reminder that sentiment is as important as fundamentals (maybe more so), he said in the post published Wednesday.
And by that measure, the entire oil sector is screaming: Buy me!
Over recent weeks, oil prices have been beaten down over concerns of rising production in Nigeria and Libyatwo OPEC members exempt from the deal to cut outputand increasing supply from U.S. shale producers. Goldman Sachs said earlier this week West Texas Intermediate crude could fall to $40 a barrel, while Morgan Stanley last week downgraded their 2017 WTI forecast to $48, down from $55 expected previously.
Read: The biggest problem in the oil market isnt a glutits this issue, says Goldmans Currie
However, according to the blogger, who writes the Sovereign Man blog, m ounting pessimism doesnt necessarily mean oil prices and shares with ties to the oil industry are heading south. He used the upbeat sentiment that dominated earlier in the year as an example: In January, when oil prices had doubled to $53 in 12 months, 12 out of every 13 traders were bullish on crude prices.
I dont know about you, but in my book, any rowboat with that many people leaning on one side is bound to tip over, the blogger said.
However, six months after prices have slumped 15% and traders arent nearly as optimistic anymore. The ratio of bullish to bearish bets has narrowed to about 2-to-1.
What about Americas legion of [U.S.] shale frackers, you say? Arent they the perennial spoilers for higher oil pricesadding yet more supply at OPECs expense?, the blogger said.
Well actually, the arent according to Sovereign Man. As this chart below shows, U.S. shale producers may be adding more rigs, but the new w ells arent returning as much oil as they once did. The Permian basin is one of the biggest oil regions in the U.S., contributing about 2.5 million barrels a day out of the about 9 million barrels produced in the country.
Look at the downward-trending brown linethose new wells production per rigand its clear drillers are pumping harder and harder, and getting less and less, Sovereign Man said.
My overall point? Now is a good time to be a contrarian and start buying oil stocks.