While they’re often seen as a stable, low-risk investment, energy stocks can feel the brunt of macro-economic and global headwinds. It’s all relative, though, and often, global unrest can be good for investors.
Taking a few factors into account, a long oil play in the current market could pay off. Crude oil experienced a bottoming out just before the New Year, and has slowly recovered. The West Texas Index for crude oil is currently at $53.55 per barrel, just $7 per barrel off from its lows of around $45 reached in December.
As should be expected, energy stocks have followed a similar trend. Even with the slight recovery, Crude is still trading relatively low in comparison to historic levels, and energy stocks are discounted.
At this discount, regardless of how the energy companies perform on their upcoming earnings reports, their dividend yields have become incredibly attractive. Exxon Mobile Corporation, for instance, is currently trading at $71.51 with a dividend yield of 4.57 percent. When coupled with their historic reputation for increasing dividends, and the expected recovery towards a share price of around $80, Exxon becomes a very attractive Buy.
Moreover, Chevron has seen similar price action in response to the bottoming out of Crude’s per barrel price, and has a current dividend yield of 4.01 percent.
New Sanctions on Venezuela Send Crude Higher
In addition to crude bottoming out and on a rebound tear, Venezuelan turmoil, and trade war resolution will likely continue to send stocks higher. Just Monday, Washington announced new sanctions on Venezuela’s oil exports, as a means of providing further pressure on the Maduro regime. The end goal of the sanctions is to bolster support for National Assembly leader Juan Guaido, who the United States already officially recognizes as the nation’s interim president.
“The sanctions so far have been mostly disruptive for refiners on the U.S. Gulf Coast, who are being forced to seek alternative heavy crude supplies, and have stepped up purchases from Canada,” said Vandana Hari who works with energy consultancy Vanda Insights.
“You’re getting a little bit more of a security premium built into the price today,” said John Kilduff, who is a founding partner with hedge fund Again Capital LLC regarding the ongoing situation in Venezuela. “As more of the details emerge of Maduro standing tough and trying to send the oil away from Gulf Coast refiners, and the Trump administration planning to freeze bank accounts and lock up opposition, the situation is on the boil.”
One factor, which could negatively impact the mid-term outlook of energy stocks is a slowing global growth.
“The Venezuelan political crisis as well as a Saudi pledge to lower output further should have boosted crude oil, but pulling in the opposite direction are heightened concerns about global growth, particularly that of China,” said Ole Hansen, who is the head of commodity strategy at Saxo Bank in Denmark.
Regardless of the extent of ongoing turmoil, Energy stocks can typically be considered as safe bets with a relatively low risk. In uncertain times, switching a portion of your portfolio over to stable, dividend-paying assets can be prudent.