There is value to be found in oil stocks

As discussed in my previous post the low Shiller P/E of the energy sector should trigger an appetite for oil stocks for the patient investor (at least a five year horizon). The reason for this is simple, the oil price will once again bounce, and earnings will once again soar for the oil companies and the oil service companies. Make sure you make this a diversified bet, and that you do not tilt your portfolio too much in the direction of the highly leveraged drilling, OSV or seismic companies.

I am not an expert, however this is my take on the oil price:

• Price elasticity of the oil price is immense. All we know about the future is that we don't know, and disruptions to supply may happen anywhere in the world. Currently the oversupply is 1.5 million b/d, out of a supply of 96. To me that just doesn't sound like a lot in the big scheme of things.
• Demand is growing significantly, especially in emerging markets. I am a strong believer in the growth of the emerging market transportation sector. Guys in emerging markets want a Porsche just as much as the next guy.

                             Source: Energy Information Administration

• The marginal cost of replacing the oil the world is consuming today is significantly greater than the current oil price of 45 USD a barrel. And, all my friends on the west-coast of Norway know that we are currently not working hard on replacing the oil we´re currently consuming.  

                              Source: Energy Information Administration

• Saudi Arabia and the other OPEC countries budget deficits. Decreases in government spending in order to pay for the over supply of oil may not be tolerated by the populations of these countries. At some point sooner than later OPEC will have to end the ongoing fight for marketshare in order to balance national budgets.

                                  Source: Bloomberg

Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving any compensation for it.