Crude oil is being hammered lower in trading on Wednesday, with the United States Oil Fund LP (ETF) (NYSEARCA:USO) down nearly 5% to test its early May low. The move fully reversed the small rebound surrounding the recent OPEC production meeting. While the output cap agreement that was signed last year was extended — as expected — the market was secretly hoping for more … like a deeper output cut amid still-bloated inventories.
Moreover, there is a growing sense that OPEC is losing control of the market as U.S. shale producers have aggressively lowered their cost profiles, allowing them to profitably pump with crude prices down at these levels. This wasn’t the case when OPEC first launched its oil price war in 2014 in a bid to recapture market share.
The tensions are bursting onto the surface with a breakdown in relations between the Gulf Cooperation Council countries, as Saudi Arabia and its allies accuse Qatar (a heavy natural gas producer) of cozying up to Iran, Hamas and the Muslim Brotherhood. Qater is growing isolated amid canceled flights and talk of an economic blockade.
The risk here is that a breakdown in diplomatic relations could fuel a breakdown in OPEC cooperation. Indeed, recent reports show compliance with the output freeze deal is falling. Should this continue, oil prices could careen to the downside as countries scramble to pump as much as possible before prices fall even further.
Here are seven ways to play this scenario:
Oil Stocks to Play: ProShares UltraShort Crude Oil (SCO)
As crude oil futures fall, the double inverse Proshares Ultrashort Crude Oil (NYSEARCA:SCO) fund rises at twice the rate. With crude oil trading down to a $45-a-barrel handle on Wednesday, threatening its lowest close since November, the SCO is peaking up to challenge its early May highs. A move to the November low — which would see crude oil fall to around $42 — would boost the SCO by nearly 14% compared to the 6% drop in oil.
In addition to the headlines out of the Middle East, energy commodities are being hit by inventory data showing the largest increase in stockpiles since April 2015.
Oil Stocks to Play: Halliburton (HAL)
Shares of oilfield services provider Halliburton Company (NYSE:HAL) are getting hit hard, down 4% to threaten a breakdown from a two-month holding pattern. Unable to break above its 50-day moving average in late May, the sellers pounced on a clear lack of strength. With shares already down 24% from their late-January high, watch for a move down to the September low for a further 9% drop from here, setting up a possible short-side play.
Cowen analysts lowered their price target on the stock in late April citing expectations for a profitability turnaround in the second half of the year left vulnerable to ongoing oil price volatility and increased industry capacity limiting pricing power.
The company will next report results on July 24 before the bell. Analysts are looking for earning of 16 cents per share on revenues of $4.8 billion.
Oil Stocks to Play: Schlumberger (SLB)
Schlumberger Limited. (NYSE:SLB) shares, which have already dropped nearly 22% from their January high, are falling out of a two-month consolidation range just below $70 to return to levels not seen since February 2016. There’s no downside support until $62, which would be worth a 9% decline from here if you wanted to go short or buy puts.
When the company last reported results on April 24, it highlighted that international weakness (including pricing) was offsetting any lift from a rebound in U.S. drilling activity.
The company will next report results on July 21 before the bell. Analysts are looking for earnings of 29 cents per share on revenues of $7.2 billion.
Oil Stocks to Play: Anadarko Petroleum (APC)
Anadarko Petroleum Corporation (NYSE:APC) shares are melting down, falling 6% in trading on Wednesday extending further below its 200-day moving average (which is a whopping 31% to the upside). APC, too, is a short-side play.
Shares have already lost nearly 36% from their December high and are on track to test the early 2016 trading range near $45. While that’s only a 4% drop from here, if the level doesn’t hold, the stock could be looking at a decline all the way to February 2016 lows near $33 — which would be worth a 30% loss from here.
On May 2, the company reported weaker-than-expected earnings of 60 cents per share on revenues of $3.8 billion. A series of analyst downgrades followed, including from Wells Fargo and Macquarie.
The company will next report results on July 25 after the close. Analysts are looking for a loss of 17 cents per share on revenues of $2.5 billion.
Oil Stocks to Play: Devon Energy (DVN)
Devon Energy Corp (NYSE:DVN) shares are down 6% in trading on Wednesday, capping a decline of over 30% from its December high representing a double-top test of prior highs seen in late 2015. A full waterfall collapse is underway with no significant technical support until $26-a-share or so, which represents a further 16% downside risk from here for the independent oil and gas producer with operations in the United States and Canada.
Analysts at Stifel initiated coverage in the stock in April with a bullish mindset and a $73 price target driven by optimism about its shale assets in the Anadarko and Delaware basins. This pretty much top-ticked the early April test above the 50-day and 200-day moving averages before the bears went on a rampage.
The company will next report results on Aug. 1 after the close. Analysts are looking for earnings of 39 cents per share on revenues of $3.3 billion. Until then, consider buying puts.
Oil Stocks to Play: Hess (HES)
Hess Corp. (NYSE:HES) shares risk a breakdown below critical two-year support near $45, already down 31% from the December high, setting up a decline to the January 2016 trading range near $37.50. For short traders, that would be worth a 16%-plus fall from here.
Shares were just downgraded by analysts at Goldman Sachs on May 30, adding to the downside pressure. When the company last reported results on April 26, a loss of $1.07 per share was reported on weaker-than-expected revenue of $1.27 billion.
The company will next report results on July 26 before the bell. Analysts are looking for a loss of $1.06 per share on revenues of $1.3 billion.
Oil Stocks to Play: ConocoPhillips (COP)
Lastly, ConocoPhillips (NYSE:COP) shares are down 1.9% in trading on Wednesday and are at risk of falling below their March lot, risking a decline all the way back to the 2016 summertime trading range lows near the $38-a-share level. That would be worth a 10%-plus decline from here, also easily played via puts.
COP was downgraded by Bank of America Merrill Lynch analysts on May 11 and the company embarrassingly had to restate quarterly earnings on May 4 (reporting a deeper loss of 14 cents per share) as a result of a value impairment on the Shenandoah asset in the Gulf of Mexico.
The company will next report results on July 27 before the bell. Analysts are looking for earnings of seven cents per share on revenues of $7.8 billion.