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Oil has oscillated back and forth in recent months. However, five longer-term catalysts suggest that it may be too early to give up on the sector, including:
Strategic Petroleum Reserve is Drained
The Strategic Petroleum Reserve (SPR) is a stockpile of crude oil maintained by the U.S. government for emergencies, such as disruptions in oil supply or significant price increases. Over the past three years, the SPR stock has dropped precipitously from more than 650 million barrels to ~350 million barrels of oil. Though such a vast drop in the SPR can lead to increased supply and lower oil prices in the short term, in the long term it can lead to reduced supply cushion. In other words, similar to a short squeeze, if prices begin to rise, the U.S. government will be forced to “chase price” to refill the SPR stockpile.
Previous Resistance Turns to Support
A critical bullish indicator technical analysts look for is when a previous resistance level morphs into support. The 200-week moving average is a technical tool that long-term investors look to for support. In 2018 and 2019, the United States Oil ETF ((USO - Free Report) ) overtook the level but failed to stay above it. However, in early 2022 oil retook the moving average and has remained above it since – a sign that bulls are willing to defend the level.
Image Source: Zacks Investment Research
OPEC Supply Cuts
Because OPEC (Organization of the Petroleum Exporting Countries) has the most signficant influence over global oil supply, oil cuts by the organization can have a dramatic impact on driving oil prices higher. Earlier this month, OPEC announced it would be making significant cuts to output and would seek to limit supply for the remainder of 2023.
No End in Sight for Geopolitical Concerns Over the weekend, the geopolitical picture became more muddled. Wagner Private Military Company, a Russian Paramilitary organization, attempted a coup against Russian President Vladimir Putin that was quickly squashed. While the full details of the suspected coup attempt remain unclear, a Russian fuel depot was blown up during the uprising. From an oil perspective, there is little to suggest an end is in sight, and further oil disruptions are likely to take place before the world reaches some semblance of peace.
Valuations are a Bargain
Though prices have not moved in months for many oil stocks, valuations are becoming attractive. For example, Occidental Petroleum’s ((OXY - Free Report) ) price-to-sales ratio is hovering near multi-year lows. In 2016, OXY’s p/s ratio was 5.5. Today OXY’s p/s ratio is 1.54. Savvy investors like Warren Buffett have started to take notice and have amassed large positions in cheap oil stocks like OXY. OXY also has a much lower p/e than the S&P 500.
Image Source: Zacks Investment Research
Stocks to Watch
The strongest domestic integrated oil and gas company is EQT Corp ((EQT - Free Report) ). While most domestic oil stocks have grinded sideways and are stuck below their 200-day moving averages, EQT has trended higher in the past few months.
Image Source: Zacks Investment Research
EQT also boasts impressive triple-digit earnings growth.
Image Source: Zacks Investment Research
Though domestic energy companies have attractive valuations, the most impressive price action has occurred in foreign oil producers, such as Argentina’s Zacks Rank #2 (Buy) YPF Sociedad Anonima ((YPF - Free Report) ). With oil prices depressed, YPF has exhibited impressive relative strength and broke out of a multi-month base structure to hit fresh highs.
Image Source: Zacks Investment Research
Argentinean stocks and the MSCI Argentina ETF ((ARGT - Free Report) ) have had some of the best equity performance globally despite the rampant inflation that is plaguing the country. Colombia-based Ecopetrol ((EC - Free Report) ) is another foreign energy producer to watch – especially if oil prices rebound.
Conclusion
Though oil prices have been choppy in the short term, it is essential not to fall victim to receny bias. Supply concerns, geopolitical turmoil, and the long-term technical picture suggest that oil may be ready to resume its uptrend soon. While domestic oil producers have attractive valuations, foreign oil producers outperform from a price and volume perspective.
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The Bull Case for Oil Prices (5 Catalysts)
Oil has oscillated back and forth in recent months. However, five longer-term catalysts suggest that it may be too early to give up on the sector, including:
Strategic Petroleum Reserve is Drained
The Strategic Petroleum Reserve (SPR) is a stockpile of crude oil maintained by the U.S. government for emergencies, such as disruptions in oil supply or significant price increases. Over the past three years, the SPR stock has dropped precipitously from more than 650 million barrels to ~350 million barrels of oil. Though such a vast drop in the SPR can lead to increased supply and lower oil prices in the short term, in the long term it can lead to reduced supply cushion. In other words, similar to a short squeeze, if prices begin to rise, the U.S. government will be forced to “chase price” to refill the SPR stockpile.
Previous Resistance Turns to Support
A critical bullish indicator technical analysts look for is when a previous resistance level morphs into support. The 200-week moving average is a technical tool that long-term investors look to for support. In 2018 and 2019, the United States Oil ETF ((USO - Free Report) ) overtook the level but failed to stay above it. However, in early 2022 oil retook the moving average and has remained above it since – a sign that bulls are willing to defend the level.
Image Source: Zacks Investment Research
OPEC Supply Cuts
Because OPEC (Organization of the Petroleum Exporting Countries) has the most signficant influence over global oil supply, oil cuts by the organization can have a dramatic impact on driving oil prices higher. Earlier this month, OPEC announced it would be making significant cuts to output and would seek to limit supply for the remainder of 2023.
No End in Sight for Geopolitical Concerns
Over the weekend, the geopolitical picture became more muddled. Wagner Private Military Company, a Russian Paramilitary organization, attempted a coup against Russian President Vladimir Putin that was quickly squashed. While the full details of the suspected coup attempt remain unclear, a Russian fuel depot was blown up during the uprising. From an oil perspective, there is little to suggest an end is in sight, and further oil disruptions are likely to take place before the world reaches some semblance of peace.
Valuations are a Bargain
Though prices have not moved in months for many oil stocks, valuations are becoming attractive. For example, Occidental Petroleum’s ((OXY - Free Report) ) price-to-sales ratio is hovering near multi-year lows. In 2016, OXY’s p/s ratio was 5.5. Today OXY’s p/s ratio is 1.54. Savvy investors like Warren Buffett have started to take notice and have amassed large positions in cheap oil stocks like OXY. OXY also has a much lower p/e than the S&P 500.
Image Source: Zacks Investment Research
Stocks to Watch
The strongest domestic integrated oil and gas company is EQT Corp ((EQT - Free Report) ). While most domestic oil stocks have grinded sideways and are stuck below their 200-day moving averages, EQT has trended higher in the past few months.
Image Source: Zacks Investment Research
EQT also boasts impressive triple-digit earnings growth.
Image Source: Zacks Investment Research
Though domestic energy companies have attractive valuations, the most impressive price action has occurred in foreign oil producers, such as Argentina’s Zacks Rank #2 (Buy) YPF Sociedad Anonima ((YPF - Free Report) ). With oil prices depressed, YPF has exhibited impressive relative strength and broke out of a multi-month base structure to hit fresh highs.
Image Source: Zacks Investment Research
Argentinean stocks and the MSCI Argentina ETF ((ARGT - Free Report) ) have had some of the best equity performance globally despite the rampant inflation that is plaguing the country. Colombia-based Ecopetrol ((EC - Free Report) ) is another foreign energy producer to watch – especially if oil prices rebound.
Conclusion
Though oil prices have been choppy in the short term, it is essential not to fall victim to receny bias. Supply concerns, geopolitical turmoil, and the long-term technical picture suggest that oil may be ready to resume its uptrend soon. While domestic oil producers have attractive valuations, foreign oil producers outperform from a price and volume perspective.