Lately a bunch of folks have asked me this question: Is now the time to buy energy stocks?
And I understand why people are asking this; US crude prices just hit a 15-month high after the EIA announced that inventories fell again last week.
On top of this, there has been further speculation that OPEC nations will agree to cut oil production at its November meeting. If it goes through, this would be OPEC’s first major agreement in years. Russia and Saudi Arabia, the world’s two largest oil producers, have been talking about capping production.
However, I wouldn’t buy energy stocks just yet. OPEC has been talking up the market, but it’s still just talk at this point. Furthermore, this this is the time of year when worldwide demand drops off.
So while crude oil inventories have been tapering off in the U.S., I don’t expect this trend to continue. And while crude oil may be trading at around $50 today, I wouldn’t be surprised to see it fall to $38 in the coming weeks. That’s all due to normal, seasonal shenanigans.
In addition, I don’t expect that third-quarter earnings season will do the energy sector any favors. Energy remains the primary drag on the S&P 500, with forecasts calling for an 11.3% sales decline a staggering 68.4% drop in earnings.
Now, there is always an exception to the rule.
NiSource Inc. (NI) is one of a few energy stocks that I recommend right now. As a natural gas company, it has excellent forecasted sales and earnings. It certainly helps that we’ve just has an abnormally hot summer, and we’re supposed to have a cold winter. This is expected to result in record earnings for NiSource, with analysts calling for 33.3% bottom-line growth. NI also has a solid 2.8% annual dividend yield. NI is currently a B-rated Buy in Portfolio Grader.
For the most part though, I’d recommend staying away from energy stocks for now.
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