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More downside ahead for oil will make oil stocks a buy: Analyst

Lawrence Lewitinn
Lawrence Lewitinn

It's been a wild few days for crude but one energy analyst sees one of the biggest buying opportunities for oil and oil-related companies.

After rallying some 25 percent from the middle of last week through Monday, the price of a barrel of oil (CLV15.NYM) dropped 8% on Tuesday. Manufacturing data from China added to worries about the country’s economic growth and demand for energy.

The supply side also shows the potential for lower crude pries in the near term, according to Ted Izatt, chief strategy officer at SDKA International. He sees expected additional oil from Iran, Iraq, and not much decline from American producers are harkening back to another time in crude’s history – 1998, when barrels traded below $11.

“I’m not saying they will go down that far,” Izatt said. “I’m just pointing out that the situation is such that they could go down. I think that when you get down to the low $40s, $30s, that’s a much more reasonable situation.”

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Comparing oil to the natural gas energy equivalent would price crude in the high $20 level, claims Izatt. “There is definitely a little more downside risk here near term,” he concluded.

Lower prices will have a stimulus effect on global growth, Izatt predicted.

“There is over $6 billion a day of money going back into the [global] economy because of these lower oil prices,” he said. “That will take time for us to see but you are going to see better and better economic numbers due to that.”

But he also anticipates that lower prices will also lead producers like OPEC, Russia, and the United States will simultaneously pull back on supply. “You’re going to have a decline in production in the U.S. as capital spending is reduced," said Izatt.

The net result will be a rebound in in oil prices sometime in 2016. For Izatt, that makes oil and oil-related companies a buy.

“A reasonable price into next year might be in sort of the $50 to $60 range,” he said. “It’s hard to predict the exact timing of all these things. That why from an investor’s standpoint people need to be working their way into these investments now because it’s hard to know exactly when it will occur.”

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