Crude oil has had a very volatile couple of years. In the summer of 2014, crude was trading over $100 a barrel. Early this year, the crude fell below $30, with a low of $26.05 in February. After doubling in price to a high of $52.22 less than a month ago, oil is now trading at $44 a barrel.
The reason for the recent volatility comes from both the supply and demand side. On the demand side, economic uncertainty has brought into question what the demand will be from large oil consumers like China and the United States. On the supply side, inventories have grown as more oil has come to market. New technology leading to more discoveries of energy resources has been a bearish combination, resulting in lower oil prices.
The recent pullback looks to be an opportunity. The last few weeks sellers have come into crude due to an OPEC failed agreement to reduce supply. In addition, Trump’s rise in the polls have destabilized markets, keeping buyers from taking risk in an asset class such as oil.
Once the election has passed, expect markets to stabilize and a bid to come into oil. Below I talk about 5 ways investors can expose themselves for a move back above $50 in crude oil.
2 ETFs to buy
United States Oil Fund (USO - Free Report) is an ETF that reflects the performance of the spot price of West Texas Intermediate (WTI) light, sweet crude oil. This ETF will move up and down with the price of crude and give an investor a liquid way to get in and out of the oil market. There is a .45% expense ratio for the fund.
Velocity shares 3X long crude oil (UWTI is an ETN composed of WTI futures contracts that will move three times the daily move of crude oil. For the aggressive investor, this is the way to capture an upside move in crude oil. However, when crude moves lower, this instrument moves three times lower then USO would.
3 Stocks to buy
The companies below will benefit in a rising crude oil environment, as the recent slump in energy stock prices is overdone. Investors in these stocks will benefit from higher oil prices, which will help them perform fundamentally better.
Plains All American Pipeline (PAA - Free Report) that is a Zacks Rank #2 (Buy) that engages in the transportation, storage, terminalling, and marketing of crude oil, natural gas liquids (NGL), natural gas, and refined products in the United States and Canada.The Houston-based company was founded in 1998 and has 5400 employees.
Plains All American has a $11 billion market cap with a Forward P/E of 38. The stock sports Zacks Style Scores of “B” in both of Value and Momentum. A rather large dividend is available for investors with an almost 8% dividend payout.
Last week the company reported earnings with a 29% beat on EPS, as well as a beat in revenue. Analyst are raising estimates, with 2016 estimates rising 8.6% over the last 60 days. For 2017, estimates have gone 9% higher over the same timeframe.
Diamondback Energy (FANG - Free Report) is a Zacks Rank #2 (Buy) that is an independent oil and natural gas company, focuses on the acquisition, development, exploration, and exploitation of onshore oil and natural gas reserves in the Permian Basin in West Texas. The company was founded in 2007 in Midland, Texas and has 140 employees.
Diamondback has a market cap of $7 billion and expected 3-5 year EPS growth rate of 23%. The stock has a 77 forward PE because of the company’s growth rate. For this reason, valuation comes into question, resulting in the stock sporting a Zacks Style Score in Value of “F”.
However, analysts expect the earnings momentum to continue. Over the last month, 12 analysts have taken their estimates higher for the current quarter, while only 4 have taken estimates lower. Q3 earnings will be out Novemeber 8th, over the last month estimates have gone 17% higher, from $0.30 to $0.35.
The company has surprised the consensus estimates to the upside five straight times, with the stock price following earnings. Expect another beat to push the stock to new highs, back over the psychological important $100 level.
Chevron (CVX - Free Report) is a Zacks Rank #2 (Buy) and the fifth-largest integrated energy company in the world. Headquartered in San Ramon, California, and conducting business in approximately 180 countries, this highly competitive corporation is engaged in every aspect of the oil and natural gas industry, including exploration and production; refining, marketing and transportation; chemicals manufacturing and sales; and power generation.
The company has a $197 billion market cap with a 4% dividend. The stock has a forward PE of 86 and doesn’t sport great Zacks Style Scores. However, recent earnings have investors evaluation the long-term prospects.
In late October, Chevron reported Q3 earnings of $0.68 verse $0.39 expected. Upstream production was impressive, with $454 billion in earnings verse the $59 billion seen last year. The company also raised the dividend to $1.08 a share.
Estimates for both 2016 and 2017 have shot higher over the last week. For 2016, estimates have gone from $1.17 to $1.22, or 4%. For 2017, $4.97 to $5.09, a 1.6% jump. The company next reports in February, so expect Chevron to move with the price of oil until then.
Trading volatile oil moves isn’t easy. The volatility this year has been violent and hurt many investors in the process. The recent dip provides speculators with an opportunity to get in at lower prices, with the high probability of a bounce back to the $50 area. Whether ETFs or stocks, it’s time to go long crude oil once again.
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