Oil stocks should be through the roof, right? Last year around this time, oil was about $20 a barrel. Today it’s around $60 a barrel.
That’s a tripling of the price of crude, so oil companies must be basking in this newfound windfall. But they’re not.
Most big oil stocks are up year-over-year at this point, given the economic recovery and high prices. However, the high prices are in large part due to a weakening dollar over the past year. The dollar and oil prices have an inverse relationship and the dollar is much weaker than it was a year ago.
The seven oil stocks that I feature below appear on the comeback trail, but don’t count on it.
- Phillips 66 (NYSE:PSX)
- Royal Dutch Shell (NYSE:RDS.A)
- Valero (NYSE:VLO)
- HollyFrontier (NYSE:HFC)
- Cabot Oil & Gas (NYSE:COG)
- Ultrapar Participacoes (NYSE:UGP)
- Total (NYSE:TOT)
Oil Stocks Being Squeezed by Weak Demand: Phillips 66 (PSX)
The first sector in the energy market that’s affected by weak demand is the midstream sector. That’s basically pipeline and storage companies. Their business isn’t directly linked to the price of oil, but the volume of product flowing through their pipes.
We’ve started to see oil inventories growing in February and into March. That means demand is slowing.
This could be a signal that U.S. consumers are slowing their spending now that we’re slowly going back to a more stable reality as vaccines get distributed.
In a consumer-driven economy, when the consumer stops spending it has broad implications across sectors, including midstream oil stocks like PSX.
The stock is up 18.42% year to date and still has a 4.27% dividend, so it’s not struggling at the moment. But if demand remains weak, this will be the first sector to show it.
Royal Dutch Shell (RDS.A)
The is one of the Big Oil stocks that has been knocked around since late 2019. Its diversification hurt it in 2020, simply because every sector of the energy patch took a beating in the U.S. and around the world.
Having weathered plenty of storms since its founding in 1907, it knew short-term survival was key to long-term viability, and the company did what it had to when the pandemic hit.
Now, investors are coming back in, expecting the global economy to keep on expanding. But the growing efforts to switch out fossil fuels for alternatives is already eating into demand. And a weak recovery won’t help much.
RDS.A is up 12% year to date and its 2.7% dividend is attractive, but it’s not a great way to spend your money at this point.
While PSX is a midstream player with some downstream operations, VLO is downstream player focused on storage and refining.
Given the fact that demand is looking lighter than expected, that means there’s less demand for refining oil and natural gas stocks.
This is the disconnect that many people miss in the markets. Oil prices are high, which they take to mean demand for oil is high, yet that’s not really the case. A weaker dollar and plenty of operations going offline in 2020 mean demand may be returning, but only relatively more than the last year.
But in a hot market where investors are looking for growth, the energy patch is taking some of that money now and VLO is part of that trend in oil stocks. The stock is up 28% year to date, with a 5.46% dividend.
Similar to VLO, HFC is a refiner with some asphalt operations as well. Asphalt goes hand in glove with refining, since it’s made from materials generated during the refining process. This is a direct play on infrastructure growth.
HFC also refines jet fuel, so it’s been an indirect way to play the resurgence in air travel that’s supposed to happen but has yet to materialize.
HFC stock illustrates the optimism in a 2021 recovery in energy demand – HFC is up 41% year to date, which is most of its return for the past 12 months, and has a 3.8% dividend.
Cabot Oil & Gas (COG)
The Marcellus Shale is one of the biggest shale fields in the U.S., covering eight states from New York to Tennessee. COG is an exploration and production company (aka, an upstream energy company or an E&P) that is focused on operations in Pennsylvania.
COG is fracking for massive reserves of natural gas in the shale.
E&Ps are most sensitive to demand since they depend on selling their output to the market at the best possible price. Prices are certainly higher than the cost to get the natural gas out of the ground, yet if demand isn’t there, it’s tough on supply.
COG has a $7.5 billion market cap, which isn’t huge for most of the oil stocks feature here, so it’s a bit more at the mercy of the markets. The stock is up 15% year to date. That isn’t encouraging enough, if demand doesn’t expand.
Ultrapar Participacoes (UGP)
While it may not be on your list of key oil stocks, UGP is an interesting player in South America’s economic powerhouse, Brazil.
UGP runs distribution operations as well as some production operations for industrial and retail fuels as well as pharmaceutical and beauty products. It’s an odd combination to be sure, but it’s been in business since 1937, so this unique collection of businesses may be a key reason why it has survived so long.
The trouble is, Brazil has done little to stem the pandemic and remains mired in that economic turmoil, which affects all its markets internally and externally.
The stock is declined 18% year to date and that trend will likely continue.
Along with RDS.A, TOT is one of Europe’s big oil stocks. And like its Anglo-Dutch competitor, France-based TOT is a big global player and has been since 1924.
As a big integrated oil company, it initially took advantage of France’s colonies as energy-rich resources, but has expanded beyond them in recent decades. Without significant operations in the U.S. market, it has been able to maintain its influence even in the more energy-conscious markets of Europe and developing nations.
It has been doing well in the past 12 months and is up 12% year to date and refused to cut its dividend when its peers did. That dividend now sits at 6.7%. But that could be in danger if demand doesn’t meet expectations or its transition to alternative energy slows.
There’s more risk than reward here.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
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