How low will oil prices go, and for how long?

The price of West Texas Intermediate crude oil continues to fall. OPEC launched a price war. No one knows how low oil prices will go nor for how long. But diversified oil and gas stocks Imperial Oil and Suncor Energy remain buys for rising dividends and long-term gains.

Oil & Gas StocksThe price of oil has recently fallen further. If prices stabilize here or fall further, it will make life more difficult for producers and oil services stocks.

There’s a glut of oil, of course. In the past, OPEC would cut its production. (OPEC refers to the Organization of the Petroleum Exporting Countries.) Less production worked to keep prices up.

The thing is, relatively high prices made many non-OPEC energy projects economically viable. Russia, for instance, became a major producer and the main supplier of natural gas to Europe. New technology enabled the United States to coax oil out of shale and oilfields that were formerly tapped out. Canada’s oil sands became viable. Other major non-OPEC producers include Norway, Australia, the United Kingdom (with North Sea oil) and former Soviet republics (such as Azerbaijan), among others.

Saudi Arabia and OPEC strike back

Tired of losing market share and influence, OPEC (Saudi Arabia in particular) has opened the spigots. Rising production hurts oil prices, of course. The idea is to knock out high-cost producers. Saudi Arabia, by contrast, is a low-cost producer. So it can afford to wait while high-cost producers drop out.

Projects already built in Alberta’s oil sands will produce as long as revenue exceeds their operating costs. But it’s probably no longer profitable to build new oil sands projects. High-cost producers worldwide—including weaker members of OPEC—will eventually stop investing in new high-cost capacity.

Lower oil prices typically raise demand. Consumers may choose to drive bigger vehicles such as SUVs (Sport Utility Vehicles). On the other hand, oil is usually priced in American dollars. The significant rise in the U.S. dollar makes oil more costly for consumers who earn currencies that are down relative to the dollar. This is likely to curtail some consumption and contribute to the oil glut.

We don’t know when OPEC’s price war will end. We don’t know when the oil glut will disappear. We don’t know how low unpredictable oil prices will go.

As a result, we’re keeping most oil and gas producer stocks on hold. This includes Key stocks Cenovus Energy and Encana Corp.

Buy these two fully integrated oil and gas stocks

We continue, however, to rate fully integrated producers Imperial Oil (TSX─IMO) and Suncor Energy (TSX─SU) as buys. They are also known as ‘dividend aristocrats’. That is, they raise their dividends every year.

Imperial Oil’s expected earnings of $1.82 a share this year and $2.72 a share next year comfortably exceeds its dividend of 56 cents a share.

Suncor’s expected earnings of $1.06 a share this year falls a little short of its dividend of $1.16 a share. But next year’s expected earnings of $1.43 a share exceed its dividend. If the shortfall is expected to be temporary, then Suncor may keep paying.

The Investment Reporter, MPL Communications Inc.
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