After a short-lived rebound, oil stocks are giving up their gains and I think I know why.
Oil investors are beginning to consider what might happen to their portfolios if the price of oil doesnt recover.
In this article, Ill take a look at why BP is doing this and how you may be able to protect your portfolio.
Too much oil
The reality is that too much oil is being produced: global oil supply is currently around 1.5m-2.0m barrels a day higher than demand. Thats around twicethe UKs daily oil production.
Alongside this, a recent report by Rystad Energy and Morgan Stanley found that the vast majority of global oil production enough to meet demand has a production cost of $65 per barrel or less.
To me, this suggests that $65 could be the maximum oil price we will see during the next few years, unless global demand rises faster than expected.
Mr Dudleys cautious outlook is certainly reflected in the latest consensus forecasts for BP. Over the last three months, analysts have cut their 2015 profit forecasts for BP by a staggering 35%.
This has left BP shares looking much more expensive than you might expect, on a 2015 forecast P/E of 13.5.
Interestingly, the outlook for Royal Dutch Shell (LSE: RDSB) is much brighter, perhaps because of its high levels of gas and LNG production. The latest consensus estimates for Shell put the firm on a 2015 forecast P/E of 10.4, which still looks good value to me.
Another firm that should be relatively safe is Soco International (LSE: SIA), where low production costs and net cash of more than $280m should mean that shareholders are relatively safe. However, analysts have also taken a red pen to Socos earnings forecasts, and the firms shares no longer look especially cheap, on a 2015 forecast P/E of 14.2.
What not to buy
Enquests $1bn net debt looks especially risky, in my opinion, despite the firms lenders agreeing last week to relax the terms of the debt.
While Tullows financial situation is more robust, the firm has $3.1bn in net debt and currently trades on 25 times 2015 forecast earnings. I suspect that there may also be more downside for Tullow shareholders.
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