Oil Stock Gains in 2H 2024

Capitalizing on Higher-for-Longer Energy Prices

Oil is bullish headed into late 2024. 

We are anticipating slightly higher oil prices as a result of:

  • Improving economic data in the United States and Europe

  • Continued demand growth from India

  • Increasing demand from China’s reopening of its economy following the abandonment of its draconian zero-COVID policy

  • Higher-for-longer inflation manifested in commodity prices

Oil Technicals and Fundamentals

Looking back at the chart, oil peaked out at nearly $130 in early 2022 after running hot in late 2020 and early 2021 on high inflation. 

Oil pulled back starting in 2022, and has consolidated gains near the $75 level for most of the past 18 months, with a brief run to $90 leading up to the start of the Hamas/Israel conflict last October.

Oil has been breaking out for most of 2024, save for a pullback in the April/May timeframe that resulted in a higher low and the resumption of an uptrend.

There is a broad case to be made for continued bullishness in the oil complex given the economic growth expected in the US, Europe, and Asia in the second half of the year that could help liquidate inventories.

And there are ongoing bullish fundamentals on the supply side as well, with OPEC signaling it isn’t going to curtail mandatory cuts until 2025. At the same time, production growth is expected to be modest in the US this year and peak in the next few.

More broadly, production at BP and Shell has declined sharply over the past few years as their mother countries impose climate-based restrictions. BP, for example, has been planning on lowering its oil and gas production by 42% from 2.6 million barrels of oil equivalent per day in 2019 to 1.5 million barrels by 2030. As such, it has underinvested in oil production. Now, amid higher oil prices and share price underperformance relative to its peers, BP says it is going to shoot for two million barrels of daily production in 2030.

Chasing Exxon and Chevron in production terms is going to require M&A as well as capital expenditures.

Taken together, these factors culminate in a bullish outlook for the price of oil and the companies that produce it.

 

How to Best Play the Oil Market in 2024

We expect select large caps with proper diversification to outperform the broader oil complex over the next few quarters. 

We particularly like some of the top dividend-paying companies such as Irving, Texas-based ExxonMobil Corp. (NYSE: XOM). 

ExxonMobil Corp. (NYSE: XOM)

ExxonMobil is an integrated energy firm that has grown to become a leader in almost every aspect of the energy and petrochemical manufacturing sector. 

That includes both upstream (exploration and production) and downstream (manufacturing, refining, and distribution) segments as well as a chemicals segment. 

That diversification aids in softening the blow of the industry’s wild price gyrations since downstream businesses tend to benefit when oil prices are low while upstream businesses tend to prosper when they're high. 

At present, ExxonMobil’s downstream segment generates the most revenue while its upstream segment generates the most profit.

ExxonMobil pays a strong quarterly cash dividend of $0.95 per share (~3.35% dividend yield) and has increased its dividend annually for roughly four decades.

Shareholders can opt for a DRIP (Dividend Reinvestment Plan) wherein they can automatically have their cash dividends reinvested in additional, or fractional, shares of the company on the dividend payment date. 

Marathon Petroleum Corp. (NYSE: MPC)

From the downstream market segment, we like Findlay, Ohio-based Marathon Petroleum Corporation (NYSE: MPC).

In the petroleum sector, the refining process can take place either in the midstream or downstream market segment.

In the case of Marathon, the company is a leading integrated downstream energy company that operates the nation’s largest refining system with 13 refineries and 2.9 million barrels per day of refining capacity. 

The company’s refineries are integrated via pipelines, terminals, and barges to maximize operating efficiency. That allows the company to utilize its processing capacity to optimize operations and produce higher-margin products while offsetting some of the increased operating expenses resulting from ongoing supply chain bottlenecks. 

Marathon’s marketing system includes ~7,000 independently owned retail outlets across the United States. 

Marathon also owns the general partner and majority limited partner interest in MPLX LP — a midstream company focused primarily on the transport, storage, and distribution of crude oil and refined products. 

As primarily a downstream energy company with a substantial midstream component, Marathon Petroleum remains highly flexible, making it uniquely positioned to capitalize on the current oil-price environment. 

Marathon pays a robust quarterly cash dividend of $0.82 per share (~1.93% dividend yield). Marathon’s dividend can also be converted into a DRIP.  

 

Long and Short ETFs

To play the direction of oil’s price to the up or downside in the short-term, you might look at leveraged ETFs designed to reflect twice the daily price movement of the oil and gas exploration and production subsector.

Using our projected oil price range of $70 to $90 per barrel for the next three quarters, you could go long near the low end and short near the high end. 

The Direxion Daily S&P Oil & Gas Exp. & Prod. Bull (NYSE: GUSH) is designed to deliver 200%  to the upside. 

The Direxion Daily S&P Oil & Gas Exp. & Prod. Bear (NYSE: DRIP) is designed to deliver 200% of the inverse of the downside. 

Two important notes: 

  1. These funds do not track oil’s price. Their underlying index is the S&P Oil & Gas Exploration & Production Select Industry Index, which generally moves higher or lower with oil prices.
  2. These would be short-term trades not to be held more than a week or two.

So what’s next in the oil space?

We are anticipating continued bullish trade in the oil sector for the remainder of 2024 and into Q1 2025 at the $80 to $90 per barrel range.
We still see plenty of long-term value upside in select diversified large-caps with robust dividends. 

Those taking a long-term value approach by establishing positions in select, well-diversified oil firms with solid projects, robust dividends, and healthy balance sheets should be well-rewarded over the longer term. 

As always, establish your positions incrementally and look for opportunities to buy the dips. 

Editor’s Note: Oil is NOT the only sector we cover. Presently, our bullish indicators are pointing to an extended rise in gold prices and related stocks. To that end, we’ve uncovered an extraordinarily well-run gold mine on the verge of approval that we think will deliver significant upside for ourselves and readers. Click here to learn more.