Where Will Oil Flow? Top Picks to Go Long or Short
The energy space is brimming with excitement as oil has seen a dramatic resurgence from its 12-year lows reached in February to the current level of just under $50. And the joy multiplied when the International Energy Agency (IEA), the OECD energy watchdog, proclaimed that the long-beleaguered commodity’s volatility is now a thing of the past. In fact, the IEA sees crude moving toward stability.
This was aptly reflected in the most recent monthly report of the Paris-based agency which raised its estimate for global daily oil demand this year by 0.1 million barrels to 96.1 million barrels.
Will the Crude Rally Last?
We feel the party for the bulls is here to stay as more good news has poured in. In its June Oil Market Report, the IEA revealed lower stockpiling of oil then originally apprehended. The momentum we saw last week, when oil prices climbed above $51/bbl to an 11-month high, lifted the spirits of investors. The support came from the ongoing outages in Nigeria and Canada as well as a steady decline in U.S. oil production.
Looking forward, we see brakes on production being pulled by an economically devastated Venezuela and an ISIS-affected Libya. Per IEA, in May, outages in the Organization of Petroleum Exporting Countries (OPEC) and non-OPEC countries cut global oil supply by nearly 800,000 b/d.
Or Are Oil Prices Still Slippery?
On the bearish side, however, in the last four sessions, the commodity stayed below the $50 per barrel mark. The downcast mood was precipitated by the dual effect of a surprise build in U.S. crude inventories last week per the American Petroleum Institute (API) alongside the buildup toward Britain’s referendum “Brexit” next week over its future association with the European Union. These events cast a pall over the broader market and dragged the German 10-year note to the negative return territory for the first time in history, simultaneously making the greenback stronger. Our bearishness stems form the fact that the strength in the greenback would make exports dearer at a time when excess domestic supply is breathing heavily on crude prices. The return of some of the production outages could also adversely affect the commodity.
Verdict: Crude at a Crossroad
We feel investors may be tizzy as the fortunes of the commodity have come at a crossroads. Per British multinational banking and financial services company, Standard Chartered plc the state of commodity currently reminds of what can be called "'reverse Goldilocks - it's not hot enough and it's not cold enough. If you're bearish, it's may be not low enough for the bears and it's not high enough for the bulls.’’ The way for investors we feel could be clearer by Wednesday’s decision by Fed about whether to go for a rate hike. Although market consensus points to another status quo our apprehension is fuelled by dismal domestic jobs report may push towards rate hike making crude exports uncompetitive at this time of oversupply.
Picking Stocks Either Way?
The energy sector has gone haywire with the crude carnage. On top of that its wide array of players are muddling up investors' stock picking power. This is where the Zacks methodology could offer some relief. One could narrow down the list using our VGM score. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows investors to eliminate the negative aspects of stocks and select winners. Inversely the tool can be used to zero on stocks by removing the positive aspects and pick losers that are great pick for shorting. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score.
We have narrowed down our search to the following stocks based on Zacks Rank and VGM score.
Top Stocks to Buy
McDermott International Inc. MDR is a global provider of integrated engineering, procurement, construction and installation (EPCI) services for upstream field developments.
McDermott International has a Zacks Rank #1 and a VGM Score of A. The company has expected earnings growth of 15.5% over the next five years. It has a P/E (F1) of 89.44. Its earnings estimate for the current year has improved 25.0% over the last 30 days.
Tallgrass Energy GP, LP TEGP based in Leawood, KS is engaged in the transportation, storage and processing of natural gas, along with the transportation of crude oil.
Tallgrass Energy has a Zacks Rank #1 and a VGM Score of A. The company has expected earnings growth of more than 90% for the current year. It has a P/E (F1) of 24.14, which is lower than the industry average of 24.90. Its earnings estimate for the current year has improved 10.2% over the last 30 days.
Best Stocks to Short
Most investors aren’t comfortable shorting stocks because of the potential of unlimited loss. Unfortunately, this creates missed opportunities in volatile markets. A short seller in a volatile market can play offense, while everyone else plays defense. This opens up more creative ways to make money. For those who might be new to the world of shorting stocks, we encourage the use of stop loss orders to minimize risk.
TX-based Kinder Morgan, Inc. KMI is one of the largest energy infrastructure companies in North America. The company operates approximately 84,000 miles of pipelines transmitting natural gas, refined petroleum products, crude oil, carbon dioxide (CO2) and additional products.
The stock has a Zacks Rank #5 (Strong Sell) and sports a VGM Score of D. Looking minutely, the stock fares poorly with a score of D in both parameters of Value and Growth.
Houston, TX-based Schlumberger Limited SLB is a leading oilfield services company, providing technology, project management and information services to the global oil and gas industry.
Carrying a Zacks Rank #5 (Strong Sell) and sporting a VGM Score of F, the energy behemoth is another strong contender for shorting. Analyzing closely, the stock fares poorly in terms of Value and Growth with a score of F and D, respectively.
Bottom Line
Pick your poison. Regardless of which path you choose, the underlying strength of the commodity crude remains the same. It all boils down to how confident you are in the bear argument for oil over the short term. If you’re following the commodity closely and see a gradual recovery from the current prices, then going long is probably right for you. Then again, if you are bearish and have a low tolerance for volatility, short selling should be your ideal choice.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days.Click to get this free report >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
MCDERMOTT INTL (MDR): Free Stock Analysis Report
SCHLUMBERGER LT (SLB): Free Stock Analysis Report
KINDER MORGAN (KMI): Free Stock Analysis Report
TALLGRASS ENRGY (TEGP): Free Stock Analysis Report
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