Oil Stock Gains in 2H 2023

Capitalizing on a Choppy Trading Environment 

In Q1 2023, we said,

“With the prospects for a long, drawn out war in Ukraine — coupled with strong travel numbers amid constrained global refinery capacity — we expect crude oil prices to remain in a relatively tight $70 - $85 per barrel range over the next several months with a slight bias to the downside as slowing growth manifests in the US.”

And that is precisely what we saw.

For the second half of 2023 and into Q1 2024, we are anticipating slightly higher oil prices as a result of:

  • Improving economic data in the United States
  • Continued demand growth from India
  • Increasing demand from China’s reopening of its economy following the abandonment of its draconian zero-Covid policy

We are expecting to see a gradual decline in global oil inventories over the next several quarters, which, in turn, will keep modest upward pressure on crude prices.

Further, the decision by OPEC+ to extend current production cuts, plus additional voluntary cuts by Saudi Arabia and Russia, should provide upward price support for the remainder of 2023.

The cuts by the Kremlin and the Saudis amount to 1.5% of global supply and bring the total pledged cuts by OPEC+ to 5.16 million bpd.

OPEC+, which pumps around 40% of the world's crude oil, already has in place cuts of 3.66 million bpd, amounting to 3.6% of global demand, including 2 million bpd agreed last year and voluntary cuts of 1.66 million bpd agreed in April and extended to December 2024.

Also impacting physical supply is the recent closure of the Iraq/Turkey export pipeline resulting from a dispute over Kurdistan, which removes about 450,000 barrels per day from global output. More talks will be needed in order to resume the flow of oil there.

Short sellers will continue to provide somewhat of a counterbalance, keeping a cap on oil prices over the coming few quarters.

Assuming Xi doesn’t pull a Putin-part-deux and invade Taiwan, and Kim Jong Un refrains from sending any nukes over South Korea, oil prices should remain well below the $100 per barrel mark throughout the remainder of 2023 and into the early part of next year.


Oil Supply-Demand Fundamentals

Oil markets are currently struggling to find direction as conflicting data points continue to cloud the near and medium-term outlook.

Bearish macroeconomic indicators and concerns over demand growth are clashing with resurgent oil use in key consuming countries such as India and China.

According to the IEA Oil Market Report, world oil demand will grow by 2.4 mb/d in 2023 to 102.3 mb/d — a new record.

Total oil supply is forecast to reach record high levels of 101.3 mb/d this year and 102.3 mb/d next year.

Russian oil exports dropped by 260 kb/d in May 2023 to 7.8 mb/d — largely unchanged from a year ago.

Global refinery throughputs are forecast to increase by 1.8 mb/d in 2023 and 1 mb/d next year when it averages 83.4 mb/d.

Looking forward, supply growth is forecast to lose momentum next year, which could leave the market in deficit with 2H 2024 looking particularly tight.


How to Best Play the Oil Market in 2H 2023

Despite the choppy trading environment, we expect select large caps with proper diversification to outperform the broader market 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.

On July 13, 2023, the company announced the acquisition of Denbury Inc. (NYSE: DEN) — an experienced developer of carbon capture, utilization and storage (CCS) solutions, and enhanced oil recovery — in an all-stock transaction valued at $4.9 billion.

The synergies are expected to drive strong growth and returns for ExxonMobil. The acquisition of Denbury also provides ExxonMobil with the largest owned and operated CO2 pipeline network in the US at 1,300 miles.

That includes nearly 925 miles of CO2 pipelines in Louisiana, Texas, and Mississippi — located within one of the largest US markets for CO2 emissions — as well as 10 strategically located onshore sequestration sites.

ExxonMobil pays a strong quarterly cash dividend of $0.91 per share (~3.6% 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 $0.75 per share (~2.5% dividend yield), an increase of approximately 30% over its previous dividend of $0.58 per share. 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.


Wrapping Up…

Our flagship broad market monthly premium newsletter, Foundational Profits, turned bullish on oil and select oil stocks in late-2020 when oil was well below where it’s trading today.

We correctly warned of the impending “Return to $100+ Oil” and positioned readers accordingly.

We bought oil stocks when oil was trading close to $40 per barrel and held them for a year until it was closer to $85 per barrel.

We did that first via the Energy Select Sector SPDR Fund (NYSE: XLE) and then with the SPDR Oil & Gas ETF (NYSE: XOP) — owning one or both of them from November 2020 through December 2021, and harnessing the bulk of the inflationary move in energy that most government officials and pundits incorrectly labeled as “transitory.”

And although we couldn’t predict an outbreak of war in Europe, our forecast for rising oil prices proved highly accurate and lucrative.

So what’s next in the oil space?

We are anticipating continued choppy trade in the oil sector for the remainder of 2023 and into Q1 2024 at the $70 to $90 per barrel range as discussed earlier.

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 copper prices from the current sub-$4/lb level to above $5/lb over the next two to three business quarters. To that end, we’ve uncovered an extraordinarily well-run small-cap copper firm, with operations in Arizona, that’s on the cusp of something truly revolutionary in the copper extraction space. If proven at scale, the technology has the potential to completely change the way copper is extracted from certain types of ore bodies around the world and industry-wide. Click here to learn more.