Does the low Brent crude price make oil stocks a buy?

And how do you go about obtaining oil shares?

In the current situation where the oil price has dropped so low, is there a possibility for a normal person to buy shares in any of the oil companies? If so, how do you go about obtaining oil shares? Which companies are good buys?

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Are oil stocks a buy?

The fall in the oil price has unfortunately come at a time when the world is adjusting to the global coronavirus pandemic. In March Opec+ failed to reach an agreement on reduced output in the production of oil. Russia most notably refused the proposal that would see it cut its production.

This sent the price of oil well below what is needed for the producers to cover their operational costs.

The global pandemic has seen the consumption of oil fall well below the forecast production as shown in the chart below. This leads to a build up in supply, and therefore pressure on the oil price.

As the consumption of oil starts to normalise, we would hope to see a reduction in the oversupply of oil in the global market. Until such time there needs to be an agreement or a voluntary reduction in oil production by oil-producing countries. It seems unlikely that they will find an agreement in the short term.

Companies such as Goldman Sachs, Morgan Stanley, Bank of America Merrill Lynch and Citi Group have lowered their oil price forecast several times so far this year. Some have lowered their forecast twice in one month. This simply shows the degree of uncertainty in the price going forward.

Warren Buffet commented on the oil price, saying that “it just doesn’t work at $20 a barrel”, nor does it work at $35 a barrel. At $45 to $55 a barrel, it is estimated that most major producers will be at their external break-even point along with some cost-cutting measures. However, the fiscal break-even point is higher for major oil-producing countries.

It may be a fair assumption to say that it is likely that the situation will remedy itself in due course. However, the question is, what will happen to oil producers in the meantime?

Oil-producing companies that have a high level of debt may struggle to endure this period. A company like Sasol has had issues with its Lake Charles project which has been delayed and is over budget. This, coupled with the collapse in the oil price, has left the company in a difficult position where there is potentially a risk that an investor could suffer an absolute loss of their capital.

Investing in oil stocks in the current environment could be seen as a high risk, high reward trade-off.

Other stocks both locally and globally appear to be very attractively priced while potentially carrying less risk than oil stocks.

You may want to first consider other stocks before making a decision.

An oil and gas company that Orbis is holding in its global equity portfolio at a relatively small allocation is Total SA. This would be the first company that I would consider based on the fact that a respected asset manager has included it in its portfolio, indicating that it has been researched as an investment prospect.

Trading platforms to access stocks

Selecting a trading platform is a bit like picking a new car. It’s different for each person as they can vary significantly in many aspects. Some may be more suitable or palatable than others.

There are several trading platforms which are available for self-investors. These platforms will likely have different fee structures and different minimum investment requirements which all need to be considered alongside your investment strategy to find the most suitable one for you.

Trading platforms can also have a limited array of underlying stocks which are accessible by investors, while other trading platforms can follow an open architecture approach where there is a wide range of investment opportunities. I would suggest that you consider your long-term investment strategy as well as the underlying stocks that you would like to invest in. This will help you to see which online trading platforms are best suited to your needs.

The views expressed are my opinion, not a recommendation, and should not be used as financial advice. I would encourage you to seek comprehensive financial advice that is based on your circumstances and your overall financial plan.

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