EOG Resources (EOG) and Weatherford International (WFT) demonstrate how energy companies may help restore the price of oil.
Before we dig into those two companies, let`s look at the current energy environment. Almost every day, energy investors swing from optimism to pessimism and back again, as rumors of OPEC capping production come and go.
On November 25th, OPEC canceled a meeting with Russia where it was going to offer to freeze production levels to help raise the price of oil. OPEC nations are scheduled to meet November 30th to discuss what OPEC can do without Russia and other non-OPEC countries.
Prices dropped when the meeting with Russia was canceled, and they would rise if the meeting on November 30 results in an agreement or even hints at one. (See also: Russia Works With OPEC, But Wont Cut Oil Production.)
This desperate hope for someone to manipulate oil prices may not be necessary. The market may take care of the oversupply of oil, without any help.
With oil below $50 per barrel, many oil companies cant make enough cash to afford to add new drilling sites to increase production. The result is stagnant or declining production. Supply stops growing.
At the same time, demand is remaining steady and even increasing. Supply and demand are moving in opposite directions. Eventually, supply will be too low to keep up with world demand, and oil prices will rise.
Sadly, some oil companies may go out of business before supply and demand balance out. However, companies like EOG Resources will be ready to step in and increase production quickly. (See also: Depressed Oil Prices Favor EOG Resources.)
Instead of OPEC capping production levels to reduce inventory, energy companies may do it instead as it becomes more difficult to raise cash to drill.
Signs of this scenario are already showing up. For example, Weatherford International has seen its stock price plummet as it consistently misses earnings expectations, loses money and finds itself in a position where it cant afford to expand. (See also: Weatherford Stock Has Little Value.)
No one likes to see a company in distress, but this situation is becoming more common as the market weeds out unhealthy companies from healthy ones.
The resulting drop in production is just what the oil industry needs.
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