On January 20, 2015, I published an article detailing five high debt oil stocks to avoid and 5 low debt oil stocks to buy. Bankruptcies occur when companies owe more cash than they can generate whether via cash flow, asset sales, new debt, or new equity. The key is to invest in small-cap oil stocks with relatively low debt levels versus their assets, and to avoid small-cap oil stocks with excessive debt levels. If the recovery in oil prices happens, then many oil stocks will trade at higher prices than they are now trading for. Here is a look at past oil price plunges over the last 30 years and the corresponding eventual rebound in prices: Oil prices should eventually recover and head back towards a global break-even price of $70 to $80 per barrel. And the rest of the world, including part of OPEC, supply almost 80% of the oil consumed in the world. The rest of the world cannot keep supplies stable over with sub-$50 oil. Saudi Arabia and a few other OPEC producers can make money and sustain the capital investment necessary to keep oil supplies stable at current prices.

Oil prices south of $50 per barrel is not adequate to maintain global supply over the medium-to-long-term.

Natural gas inventories are already well within the normal range of the five year average. This will rebalance North American oil storage inventories over the next few months and bring them back within the normal range of the five year average. The dramatic drop in the North American rig count to less than half of what it was seven months ago is causing growing oil and natural gas production to reverse and head into decline. While oil storage is still above the normal range in North America, it is well within the normal range in the rest of the world. The market for oil, and oil & gas stocks, has recently disconnected from the fundamentals. This is causing a route in oil stocks, especially smaller ones. Oil prices have once again dipped below the $50 level.

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