Don’t look now, but oil has hit a very bad patch.
 
Crude oil prices have skidded for four straight weeks, and closed lower over eight of the past 10 weeks, taking many oil and energy stocks down with it. In fact, last week’s 4.9% drubbing in Brent crude oil prices was the worst week in more than 18 months, and Brent crude oil is down more than 22% so far this year, a very definition of a bear market.
 
The capitulation, however, is not a reflection of fundamentals. In fact, this recent sharp sell-off provides a buying opportunity for certain Asian oil stocks. Already, that flight from risk - including oil – in the global markets was reduced late last week when the Federal Reserve Bank of St Louis president James Bullard hinted at the possibility that the Fed might again come to the markets’ rescue.
 
Indeed, one of the factors causing oil prices to slump over the last several months from $115 a barrel in June to about $85 a barrel recently has been the strengthening US dollar, which has been lifted by expectations of a tighter US monetary policy. Next, the IMF downgraded 2014 global growth projections to 3.3% from 3.7%, and lowered its projection for 2015 growth to 3.8% from 4%. On top of that, the International Energy Agency last week also reduced its own expectations for oil demand growth in 2014 and 2015.
 
But the fact is that the oil supply-and-demand balance does not shift so quickly as to justify a fall of 13% in one month, and especially not - as at one point last week - a three day drop of more than $6/bbl in the global benchmark Brent. While a credible argument can be made for oil to remain weak longer term, a rebound from oversold levels looks increasingly likely. As Goldman Sachs, bearish on oil over the longer term, pointed out late last week, this final crash in Brent was likely caused by technical reasons driven by dealer hedging of option positions. Goldman also reminded investors that unlike financial assets, commodities are spot assets clearing today’s supply and demand and that “the supply glut is not yet here today, it exists in expectations”. This means that any pessimism about future market supply should not be reflected by such a low spot price today.
 
Sandford C. Bernstein takes a much more bullish view over the longer term, noting that oil price should trade around the marginal cost of production, which they estimate to be around $100 a barrel. On the supply front, they note that U.S. oil supply growth is gradually slowing and Russian production is declining.
 
Despite suggestions leading members of Organization of Petroleum Exporting Countries will not cut output, Bernstein says it is likely they will reduce production to support prices.
 
China’s slowing growth has hurt demand for oil products like diesel, which is heavily used in industry. While investors have focused on the short term drop in total demand, oil prices will be supported in the long term by increased consumption of transportation fuels, like petrol, as car ownership rises in China. Vehicle ownership in China is just one eighth of that in developed countries according to Bernstein. Additionally, China’s Strategic Petroleum Reserve may view the weakness in oil prices as a buying opportunity.
 
So where to invest to take advantage of a possible rebound in crude oil prices? Bernstein’s list of Asian companies that are most exposed to the ups and downs of the oil price include Hilong Holdingand Anton Oilfield Services, both China-based oil service and equipment providers. Japan’s INPEX Corp and China’s CNOOC ( 883.HK ) are the two largest exploration and production stocks included on the list.
 
Anton Oilfield Services was a market darling in 2012 but has been hammered since May. The 60% drubbing has come amid lower oil prices and fears big clients PetroChina and Sinopec will spend less with external service companies. The stock has found little love with sell-side analysts, with more than half rating it a sell.
 
Given the weight of opinion against it, coupled with a rise in the oil price, Anton may make an interesting contrarian bet for more adventurous investors.
 
Investors looking for U.S.-listed energy companies, meanwhile, can click to my colleague Ben Levisohn’s post on four oil stocks poised to rally.