Energy stocks are in many ways a substitute for owning oil or natural gas. With oil at its lowest level since 2008, stocks in the sector are appealing to some value investors because they are beaten down. Unfortunately this sector is likely to remain beaten down.

Energy stocks react to supply and demand in the commodities. For now, the supply of oil is high as OPEC continues pumping to drive competition out of business. OPEC is now committed to this course of action even though it could take years to work. But quitting now means they absorbed pain for no gain and that is likely an unacceptable outcome to OPEC officials.

In the long run, OPEC is right. Some suppliers will be forced out of business as the Federal Reserve raises rates. Leveraged companies are already struggling with debt and cannot afford higher interest costs. For the energy industry, bankruptcies of overleveraged companies could help remove marginal suppliers and boost the long-term industry outlook.

If the price of oil does rise before the industry shakeout occurs, frackers and other suppliers will increase amount of oil they pump in an effort to benefit from higher prices. Based on the immutable laws of supply and demand, their actions will force the price of oil back down.

The signal to buy oil stocks will be the bankruptcy of a few large oil companies.

Until then, it’s best to look elsewhere for investment opportunities instead of bottom fishing before the bottom is in.

Michael Carr, CMT, is a subadviser to a mutual fund family and a chartered market technician. To read more Michael Carr, CLICK HERE NOW.