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Quarter-End Insights

Energy: Oil Price Collapse Takes Center Stage

The rapid decline in oil prices has created significant investment opportunities, but downside risk remains in the short term.

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  • Oil's dramatic collapse--down 45% from June--has had a tremendous impact on energy stock valuations, driving the whole sector lower. While this has created significant investment opportunities, downside risk remains in the short term.
  • The central cause of the price collapse is a supply and demand imbalance. While short-term excess supply weighs on prices, over the longer term we continue to expect $90-$100 oil prices to balance supply and demand.
  • What to watch for: capex budgets. As upstream firms release 2015 capital spending plans we'll get a better idea of whether current low prices will result in a meaningful near-term supply response. Even if it does, it will be months before evidence will be seen in the numbers.
  • There's been no safe haven in natural gas. A warm winter has pressured gas-weighted stocks, leaving few alternatives for energy investors.

 

Jason Stevens has a position in the following securities mentioned above: WLL. Find out about Morningstar’s editorial policies.