Which Oil & Gas or Energy Stocks Should You Be Looking At In This Volatile Market?
Oil prices have been moving steadily upwards in the last two years. The current price of US$76 per barrel for Brent crude on June 27, is a far cry from the sub-US$30 level which was seen in January 2016. While there are several reasons for this rise, one crucial factor has been the production cuts made by OPEC and non-OPEC producers led by Russia.
The lower oil output has led to a reduction in inventories, which caused the rise in prices. But will this price trend continue? Recent developments indicate that the global oil industry could see another shift in this pattern.
Trading energy and oil & gas stocks in this volatile market need not be daunting.
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On 22 June 2018, OPEC members met at their Vienna headquarters to discuss whether the limits on oil production should be changed. At the conclusion of the meeting, OPEC ministers agreed to increase their production to reach the 1.2 million barrels per day (bpd) target set earlier in November 2016. While the OPEC committee did not state exactly how much the increase in oil production would be, some estimates put the increased production at 600,000 bpd, the shortfall in production from its members.
Oil prices have already begun to respond to the news. Ahead of the meeting, Brent crude prices had fallen to US$73 per barrel, which subsequently spiked 3.3% after the OPEC announcement to US$75.71. It is apparent that the implications of the events have caused the increased volatility in oil prices, amid such volatility, here’s how you can make the most of it.
Use CFDs to trade energy stocks
A contract for difference (CFD) allows you to profit from rising or falling stock prices. One of the advantages that you get with CFDs is that you can put up a small deposit to take on a comparatively larger exposure.
A 10% margin is usually enough to buy a CFD. By investing, say, S$5,000, your trade size could actually be as much as S$50,000. This is a feature of a leveraged product which could enhance your returns for your smaller capital outlay, but you need to tread carefully, a trade that goes wrong could also lead to large losses.
Before you start trading CFDs, it may be a good idea to read Make The Most Of Volatility, a free eBook that provides valuable insights into trading which also describes how you can take advantage of the money-making opportunities that the markets can potentially offer.
With key events like the OPEC conference that could provide volatility in the market, it may also be seen as a budding opportunity to trade into energy stocks using CFDs. Here are a few companies that could be worth investing in.
Some stocks that could benefit from higher energy prices
Exxon Mobil Corporation
Market capitalisation: US$348.95 billion
1-Year change: -1.75%
Earnings per share: US$3.37
Price to Earnings Ratio: 24.16
The company is in expansion mode and recently began development drilling for the first of 17 wells planned at its offshore site in Guyana. The two phases of this project will produce in excess of 500,000 barrels of oil per day.
Exxon also has a new liquefied natural gas project in Mozambique as well as growth plans in the U.S. At its current level, the stock could be a sound long-term investment.
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Market capitalisation: US$81.24 billion
1-Year change: 49.95%
Earnings per share: -US$1.08
Price to Earnings Ratio: Not applicable
ConocoPhillips made a net profit of US$800 million, which translates into 62 cents per share, in the quarter ended 31 March 2018. That compares very favourably with the net loss of US$1.5 billion in the comparable quarter last year.
How has ConocoPhillips managed to better its performance? In the first quarter of this year, it realised US$36.18 per barrel of oil equivalent. Last year the price-realisation was significantly lower at US$22.94. Clearly, ConocoPhillips has much to gain from higher oil prices.
Devon Energy Corporation
Market capitalisation: US$21.95 billion
1-Year change: 27.17%
Earnings per share: US$0.39
Price to Earnings Ratio: 108.73
Oklahoma City-based Devon Energy is part of the S&P 500. It operates in the U.S. and in Canada and is the second-largest independent North American onshore oil firm.
In the first quarter of this year, the company’s Permian Basin wells in the Southeastern part of the U.S. have helped Devon Energy to boost production levels. According to its estimates, cash flow will improve by 35% this year. This figure is based on an average oil price of US$65. If oil prices are higher than that, income and profit could show a corresponding increase.
Manage your risks when you trade Devon Energy with CFDs
Anadarko Petroleum Corporation
Market capitalisation: US$36.75 billion
1-Year change: 44.82%
Earnings per share: -US$2.16
Price to Earnings Ratio: Not applicable
In the first quarter of 2018, Anadarko achieved its highest-ever sales volumes of 367,000 barrels of oil per day (bopd). The company has also commenced drilling operations at its wells in Ghana.
Anadarko is in the middle of a US$3 billion share repurchase. This is expected to be completed by June 2018. The stock has already gained 30% this year. The rise has been primarily fuelled by its aggressive stock buyback.
Oil prices in 2019
It’s important to remember that the potential energy stocks hold is based to a large extent on an increase in oil prices. While some stocks have already risen in anticipation of oil prices going up, others remain at their earlier levels.
But will oil prices continue to rise going forward? According to the Paris-based International Energy Agency, an intergovernmental organisation that was established soon after the oil crisis of 1973, the output from Iran and Venezuela in the immediate future could be lowered by 1.5 million barrels per day compared to current levels.
While other OPEC countries and Russia will try and make up for this shortfall, the IEA said that “… the market will be finely balanced next year, and vulnerable to prices rising higher in the event of further disruption.”
This could also mean that the volatility in energy stocks will continue and opportunities amid such market volatility will be present.