Oil Stocks: Is a V-Shaped Recovery in the Works?

By Fool.com

It's been a rough year for oil stocks. Persistently low oil prices continue to weigh on oil and gas activity, which is stunting the industry's growth. However, there are signs on the horizon that both oil prices and oil and gas activity is poised to pick up, leading one industry supplier to suggest that a V-shaped recovery could take shape by the first quarter of next year.

Getting to the core of the matterIn Core Laboratories recent earnings release the company provided its outlook for the oil industry. The company noted that,

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As Core notes the oil market is turning around. Not only is supply starting to come down, but demand is starting to pick up as a result of lower oil prices. While both are important, it's the supply picture that's really the most compelling for investors because of what it means for oil stocks in the future. The company noted this by saying,

We see an example of what this does to oil production in the Bakken on the following chart by the U.S. Energy Information Administration.

Source: EIA.

As that chart notes the production from new wells isn't enough to offset production declines from legacy wells leading to an overall decline in production in the region. This is decline is expected to continue as oil companies aren't completing enough wells to keep production steady, let alone from falling. Because of this Core Labs concludes that,

The flying V?This suggests that oil prices could be heading meaningfully higher. And, when that happens it will send oil and gas activity higher leading to a growth in earnings from oil stocks sending them higher, too.

Core Labs sees this turn being right around the corner as it said,

As Core notes 2015 looks to be a lost year as drilling activity still hasn't quite bottomed. That said, it doesn't see too much downside in activity from here and instead sees flattening activity in the third and fourth quarters of 2015 before drilling activity really begins to take over in early 2016, yielding a V-shaped recovery in activity.

Investor takeawayWhile it's just one company's opinion, the signs are all there that the oil market is bottoming and poised for a real recovery. There could be fits and starts along the way, but given how fast oil supplies are coming down there likely will be a meaningful rally in oil prices by the beginning of next year. That will incentivize oil companies to drill and could lead to a quick V-shaped recovery for oil stocks.

The article Oil Stocks: Is a V-Shaped Recovery in the Works? originally appeared on Fool.com.

Matt DiLallo owns shares of Core Laboratories. The Motley Fool recommends Core Laboratories. The Motley Fool owns shares of Core Laboratories. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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