Major swings in the crude oil market in the past few months have presented challenges and opportunities for companies in the oil industry. With the US benchmark having rebounded from negative territory, are oil stocks a good investment now?
The combination of a rebound in financial markets and an oil market in recovery from historic lows has boosted oil stocks. The share price of US oil and gas major ConocoPhillips (COP) has surged by as much as 115 per cent from the stock market lows reached in March, leaving investors asking, “should I invest in oil stocks right now?”
This oil stocks price analysis considers four oil stocks to watch this summer: BP (BP), Frontline (FRO), Chesapeake Energy (CHK), and ConocoPhillips. Scroll down for a video in which Capital.com’s chief market strategist, David Jones, discusses what oil stocks to invest in right now given the recent boost in oil prices off the lows, and uses technical analysis to set up potential trades.
Oil stocks to trade: are these companies well-positioned for recovery?
Oil price analysis shows the US benchmark West Texas Intermediate (WTI) crude oil price has made a remarkable recovery after turning negative for the first time in history in April, when it reached -$40.32 per barrel. It has soared from that low, rebounding towards $40 per barrel – the level at which it was trading earlier in March. That has set the backdrop for recovery from oil stocks 2020 lows. But it is not an uninterrupted upward trajectory, and the oil price dipped in recent trading sessions in a retracement of the rising trend.
Oil stocks in June 2020 have been increasingly volatile, rising sharply early in this month then subsequently falling back, then showing signs of moving higher again. This is presenting new opportunities to trade oil stocks, as companies adapt to rapidly-changing market conditions. We’ve selected four stocks for you to consider adding to your investment portfolio in June.
Shares in BP, ConocoPhillips, and Frontline plunged by around 50-60 per cent from the start of the year to late March, as a broad-based sell-off driven by the impact of the Covid-19 pandemic hit commodities stocks. The Chesapeake Energy share price plummeted by 80 per cent, but it continued to fall with the company heading towards bankruptcy.
The short-term outlook for crude oil demand remains uncertain as economies around the world are not operating as normal even as the countries come out of lockdowns to halt the spread of Covid-19. But with the resumption of some activity and share prices rising, there are opportunities for trading oil stocks.
Watch our latest oil stocks analysis video in which David Jones, chief market strategist at Capital.com, discusses four oil stocks to trade and suggests how to speculate on their volatility based on the technical charts.
BP: revised oil forecast reflects ‘enduring’ Covid-19 impact
UK-based oil and gas major BP said recently it will write down $13-17.3bn in non-cash impairment charges and write-offs for the second quarter. The company “sees the prospect of the pandemic having an enduring impact on the global economy, with the potential for weaker demand for energy for a sustained period.” It has revised down its average Brent crude oil price forecast for 2021-2050 to $55 per barrel, down by 27 per cent from its previous assumption.
BP’s UK-listed share price has reflected the broader market volatility. The stock dropped to £2.23 at the March lows from £4.80 at the start of the year, bouncing up to £3.66 earlier this month before retreating toward £3.14 per share. Although the share price has been under pressure and BP recently announced 10,000 job cuts, investors tend to view such moves as showing the company is addressing the change in the oil market.
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If the oil price continues to recover, there is potential for the share price to push back up to £3.70 per share. For the US exchange listing, analysts quote a median price increase of 13 per cent in the coming year, according to CNN Business.
Frontline: oversupply drives demand for oil tanker storage
Trading in the US and Norway-listed oil tanker company Frontline has been choppy in the first half of the year. The share price started the year around NOK113, then fell to NOK57 in line with lower oil prices. It spiked in early and late March when other stocks were falling, and again in April, rising to NOK121 per share.
The price war between Saudi Arabia and Russia, followed by the height of the Covid-19 disruptions, exacerbated oversupply on the oil market and a lack of storage capacity meant tankers were used as floating storage and Frontline’s capacity was in demand at premium prices. The company plans to invest $100 million to expand its tanker storage capacity, indicating it sees opportunities for growth. The sharp fall in the Frontline share price in May could be presenting an opportunity to buy, with the stock trying to form a base about NOK70. The recent low around NOK67 offers a potential stop-loss level for a trade.
On the technical indicators, the relative strength indicator (RSI) has retreated from being oversold and the moving average convergence divergence (MACD) is relatively flat. For the US exchange listing, analysts quote a median price increase of more than 26 per cent in the coming year, according to CNN Business.
Chesapeake Energy: negative US oil prices drive the fracking firm to bankruptcy
A major player in the US oil shale fracking boom, Chesapeake Energy has been hit hard by the steep drop in crude oil prices. In its first-quarter financial results, the company reported a net loss of $8.3bn and it is set to file for bankruptcy protection after failing to make an interest payment on its $9bn in debt.
The share price has been in steady decline, plunging from $172 at the start of the year to just $13, a fall of 93 per cent. But there has been plenty of volatility in the price in the interim, with a short-squeeze on the stock in early June more than quadrupling the value from $13 to $72 before it collapsed back again.
While some stocks of companies teetering on the brink of bankruptcy have attracted interest from investors looking to cash in outsized gains in the event of a recovery, the uncertainty surrounding the future of the Chesapeake Energy suggests holding off to see how the bankruptcy pans out.
ConocoPhillips: US producer to restart some oil output on a price rebound
US major oil and gas exploration and production company ConocoPhillips cut its oil production by around 400,000 barrels per day in response to the lack of demand in recent months, and reported a first-quarter loss of $1.7 billion compared with earnings of $1.8 billion a year ago. But the company recently said it is considering restarting some of its production in response to the rise in oil prices.
The share price sank to the $20 level in March, having started the year at $65, and rebounded briefly to $50 in early June. Despite a pullback to $42, there is still potential upside on the trend since March and the stock could push back above $50 per share. Recent support indicates a stop-loss for a trade at $36.50 per share.
If you’re looking to invest in oil stocks as a recovery play without risking exposure to another drop in the individual company share prices, consider trading contracts for difference, or CFDs, on the Oil Portfolio Index.
It consists of eight of the leading US oil stocks offered by Capital.com, including Chevron (CVX), Exxon Mobil (XOM), ConocoPhillips, Occidental Petroleum (OXY), Canadian Natural Resource (CNQ), Apache (APA), Noble Energy (NBL) and Whiting Petroleum (WLL). The index is equally weighted and serves as a market sentiment indicator to make it easier for investors to profit from the industry’s volatility.