The Price Of Oil: 6 Stocks To Play
On Monday, the price of oil experienced a significant increase, but it may still have further to go.
There are two broad categories of oil stocks that can be used to play that possibility: one category has the potential for significant upside, while the other category is safer but still offers plenty of promise.
After Saudi Arabia announced that it would reduce its oil production, the price of both Brent crude, the international standard, and West Texas Intermediate, the standard in the United States, increased by more than 2%. The members of the Organization of the Petroleum Exporting Countries (OPEC) and its partners have reached an agreement to maintain the same level of oil production through the year 2024.
At its current price of $73.62 per barrel, West Texas Intermediate crude maintains its position “above” a key “support” level in the high sixties. Over the past year and a half, the commodity’s price has been maintained at that level by a steady stream of buyers, who have kept it from falling. After experiencing slower-than-expected growth this year, the economy appears to be on track to achieve stability in the following year, which should keep the buying pressure going strong.
As inflation has shown signs of cooling, it is widely expected that the Federal Reserve will pause its interest-rate increases at its policy meeting on June 13-14. However, one more rate hike is possible in July as a result of the stronger-than-expected labor market. In any case, if the Fed decides to stop tightening monetary policy, the price of oil may continue its upward trend.
This is likely to result in stock price increases for certain oil producers, particularly those oil companies with the highest “sensitivity” ratings, which profit the most when prices for oil go up. The reason for this is that increasing oil prices lead to an increase in sales, and because these businesses have a significant amount of fixed expenses, their profits have a tendency to increase even more quickly when sales climb. This is especially true for the more modest oil-producing nations.
When the price of the commodity increases in recent times, the overall group of oil stocks has been seeing a smaller upside than is typical. This is due to the fact that the share price has already rebounded significantly from its low point in the early days of the Covid-19 lockdowns, which occurred when the price of oil hit an all-time low. The oil producer stocks that have the highest sensitivity to changes in oil prices are still in a position to benefit from a breakout in oil prices, while the gains of less sensitive stocks are likely to be less spectacular. This is why it is worthwhile to investigate these stocks.
6 Stocks to Consider
Ovintiv (OVV), which has a market value of $8.3 billion, has been one of the oil stocks in the coverage universe of Gerdes Energy Research that has shown the highest sensitivity to price changes in the oil market. An analyst by the name of John Gerdes believes that the value of the company’s estimates for Ovintiv’s free cash flow ought to have a sensitivity of approximately 55% to the price of oil. WTI has increased by approximately 5% since the end of May when it broke through a significant support level. At the same time, Ovintiv stock has increased by almost 8%, performing significantly better than the Energy Select Sector SPDR Fund (XLE), which has increased by approximately 3% over the past two trading days.
Kosmos Energy (KOS), a more diminutive oil-producing company, has a market capitalization of $2.8 billion and should also be taken into consideration. According to Gerdes, the stock has increased by approximately 11% over the course of the previous two sessions, and it has a sensitivity of almost 35% to the price of oil. Matador Resources (MTDR), an oil producer with a market value of $5.4 billion and a sensitivity of just over 30%, is another option for investors seeking a larger reward from an increase in the price of crude.
The catch is that all of this operates in the opposite direction. These stocks and their profits would theoretically suffer the most significant declines in the event that oil prices and sales fell.
Because of this, Gerdes also provides examples of stocks that are less volatile but still have a significant potential for growth when considering its projections of future profits. Gerdes sees more than a fifty percent increase in the value of the company’s future profits, despite the fact that the value of cash flows for the $63 billion EOG Resources (EOG) has a sensitivity of just under twenty-five percent.
Gerdes estimates that ConocoPhillips (NYSE:COP), a major oil company with a market cap of $120 billion, has a sensitivity of approximately 25%, while the upside potential to the value of its earnings is approximately 40%. With a sensitivity of slightly more than 25%, the $23 billion Diamondback Energy (FANG) company has close to 45% upside potential.
Unsurprisingly, oil company shares have already begun their ascent. Investors may want to get in on the action now or buy on any sign of weakness in the event that the price of oil, as well as the stocks, falls.
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