Time to Buy Black Gold?

In spite of recent volatility, energy stocks have historically provided strong returns during periods of crude oil price recovery. With crude oil prices nearing the lower end of their range and a bullish shift in fundamentals, is now the time to begin long positions in the energy sector?

Crude oil is approaching the $70 per barrel mark, a key support level that has historically triggered rebounds. This decline has also extended energy stocks to the downside, which offers an enticing entry point given that the fundamentals for crude oil are turning bullish.

Evidence of that can be seen with inventories decreasing and demand expectations rising, making the risk/reward ratio favorable for long positions.

Key Points

• Energy stocks often yield strong returns during crude oil price recoveries, making the current bullish outlook favorable for long positions.
• Crude oil’s decline to $70 per barrel extends energy stocks to the downside, creating a potential entry point with a favorable risk/reward ratio due to decreasing inventories and rising demand.
• Some ways to capital on a crude oil rebound include diversifying investments in energy stocks like Valero, Chevron, Marathon, Occidental, and Exxon.

How To Play A Black Gold Rebound?

The best play to capitalize on a bounce back in black gold is perhaps the same strategy Buffett used when buying airlines a few years ago. Why bet on a single airline stock, which has inherently high risks, when you can bet on all four major airlines? It turns out that Covid ruined his airline investment thesis but the strategy overall is a smart one and can be applied to other sectors, including oil.

For example, it’s possible to bet on the strong refining capacity of Valery Energy alongside Marathon Petroleum’s refining and marketing expertise. Bundle those two with Buffett’s favorite, Chevron  or Occidental Petroleum, which is well-positioned in the upstream sector and Exxon’s integrated operations and you cover most bases.

Energy stocks typically recover well following periods of crude oil stabilization so Valero and Marathon have the potential to outperform. It’s noteworthy also that crude oil inventories have been falling, signaling tighter supply conditions that typically lead to price increases. So too has demand picked up globally, further supporting higher prices.

Buy Stocks or Oil?

The collective play buying all four stocks might well offer the most compelling reward to risk play but it’s not the only approach if a rebound in oil occurs. Another possibility is to buy the United States Oil fund (USO), which is a proxy for crude oil exposure.

For the more adventurous types, there’s also a possible opportunity to sell put options below current share prices of all four companies, leading to an obligation to buy those stocks if and when prices fall further, while also leading to full profitability of the options if the prices stall or rebound. Further, it’s possible to buy the stocks and sell calls to benefit from lower cost basis if prices do move lower.

The bottom line is that  the current market conditions are offering a pretty nice reward to risk opportunity for investors to consider long positions in energy stocks and crude oil thanks to a combination of depressed stock prices and bullish crude oil fundamentals. Whether through common stocks, selling puts or buying covered calls, or crude oil exposure via futures or USO, multiple avenues to capitalize on the potential upside in the energy sector lie ahead.