The rally in prices for crude oil may have already run its course, so be careful if you’re looking for bargains among the likes of Marathon Oil Corporation (MRO). After all, MRO stock has been a roller coaster all year.
MRO fell as much as 6.7% in midday trades as oil prices continued to sell off. Indeed, prices for Brent crude have been in decline for about a week now after peaking above $41 a barrel and MRO has followed along.
Signs that oil prices might have finally found a bottom have investors sniffing around a wide range of sector names. Heck, Seaport Global upgraded MRO stock to buy earlier this week after the big rally in oil. At about the same time, Deutsche Bank said Marathon has “attractive remaining upside” and is the most “levered way to play a recovery.”
Fine. But be forewarned that plenty of market watchers think the oil-price rally was a fake out. Analysts at Credit Suisse think the bounce in prices is mostly over. Over at Oilprice.com, the view for upside is even more dim:
“In all likelihood oil will peak for a time as markets have yet to discount the realization of weak economic growth and the fact that no monetary policy will fix the structural problems we face. Thus, in my view, an unsustainable market rally will lead to an unsustainable rally in oil until we actually address the underlying causes of weak growth. That may or may not occur in the fall with a new administration.”
MRO Remains a Dangerous Game
The bottom line is that hope for an end to the oil glut has made MRO and other similar names riskier than ever. With a beta of about 2.0, Marathon Oil stock can be thought of as twice as volatile as the S&P 500. But then that been self-evident from its recent price action. In 2016 alone the stock has swung from a high of nearly $13 a share to a low of less than $7.
That’s perfect for traders, but not everyone is a trader.
At some point stocks across the energy sector are going to be bargains for longer term investors, but it’s simply too soon to tell. The outlook for oil prices is a hint more bullish but no one has much conviction.
If Saudi Arabia and Russia limit production as they’re mulling — and American drivers have a blowout summer driving season — the glut could start to abate sometime later this year. That’s the thinking, anyway.
But these are huge “ifs.” The global fundamentals remain firmly against the oil market.
If you’re using MRO or any other sector name as a way to play a recovery in crude, realize that you’re not investing, you’re speculating. The safe play is to stay away for now.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
