Energy stocks have been dead money over the past 18 months, brutalized by the slide in oil prices. Most stocks have slipped big time – 40% or more – as the commodity has collapsed and industry profit margins have sagged.

Oil’s Descent

In June 2014, West Texas Intermediate (WTI) crude futures were trading above $110 per barrel. Now it’s around $35 per barrel.

Oil is facing the heat on several fronts. Perhaps most important pertains to the mounting worries about China’s crude demand. In particular, the Asian giant’s currency devaluation has stoked speculation about soft economic growth in the world’s No. 2 energy consumer. 

The absence of production cuts from OPEC, the resilience of North American shale suppliers to keep pumping despite crashing prices, and a weak European economy, have all added to the bearishness. The influx of Iranian crude has put the final nail in the coffin.

Recovery in the Offing?

West Texas Intermediate (WTI) crude futures are currently up around 40% from the 12-year low of $26.21 reached in Feb. While record high inventories and robust production could still push the commodity to the depths of multiyear lows again, signs are emerging that oil prices are likely to stabilize and gradually pick up.

Not only is global demand expanding but energy companies have significantly scaled back on plans to explore for and bring out more oil. This should lead to lower future production. The price sentiment should improve further if major producers can hammer out an accord to control volumes.  

Rig Count Relief

Oil services firm Baker Hughes Inc. (BHI – Analyst Report) said in its weekly rig count that U.S. oil producers idled six more rigs over the past week, bringing the total to 386. This marks its 12th consecutive weekly decline. The oil rig count is now down 76% from a peak set in Oct 2014 and is now at its lowest level since 2009.

Industry observers view the rig count data as an indicating a break in shale drilling activities in the world’s biggest oil consumer.