With novel coronavirus cases retreating sharply in the U.S., it’s only natural for consumer sentiment to return. And despite the growth of alternative energy and electric vehicles, that means increased demand for oil stocks.
Nevertheless, many investors are undoubtedly concerned about putting money into “black gold” right now. Cyberattacks and fuel shortages certainly don’t help matters. Plus, just because Covid-19 cases are declining here doesn’t mean the same everywhere else.
Case in point is India, suffering from a spiraling crisis due to the novel coronavirus. If demand fades there — India is a critical emerging market — that too, could pose serious issues for oil stocks.
Still, analysts at Goldman Sachs are undeterred. They see crude oil rising to $80 a barrel this summer. Further, Goldman declared that the “magnitude of the coming change in the volume of demand — a change which supply cannot match — must not be understated.”
That should give investors worried about the Colonial Pipeline shutdown some peace of mind; after all, short-term supply shocks only exacerbates the underlying favorable set-up. Perhaps most encouraging for those considering oil stocks, Goldman analysts stated that “Commodity markets have looked through the sharp rise in Covid-19 cases in India.”
Ironically, one of the main arguments supporting oil stocks is the relatively frail economic recovery. Yes, we’re on the rebound but we also lost about 5% of the pre-pandemic labor force per the March jobs report and the April report didn’t help matters. This suggests that widescale adoption of comparatively expensive electric vehicles still has a long way to go, which augurs well for combustion-based cars.
Plus it stands to reason most companies will recall their employees to the office. It’s like anything else. If you’re going to receive a digital copy of a product, then you’re entitled to the cost savings associated with eschewing the requirements of physical distribution. There’s no point for companies to pay full value for basically stay-at-home independent contractors. This dynamic will likely be beneficial for the oil sector.
Here are 7 oil stocks to buy for profits off pent-up consumer demand:
- Chevron (NYSE:CVX)
- Exxon Mobil (NYSE:XOM)
- Total (NYSE:TOT)
- Lukoil (OTCMKTS:LUKOY)
- Philipps 66 (NYSE:PSX)
- TravelCenters of America (NASDAQ:TA)
- Marathon Oil (NYSE:MRO)
Before you dive in, you should also be aware that buying oils stocks isn’t failproof. For instance, if other countries push prices down, that could hurt independent U.S. energy companies and stymie our economic recovery. Overall though, pent-up consumer demand may overcome such artificial disruptions.
As the last man standing for oil stocks in the Dow Jones Industrial Average, Chevron feels like a symbol of days gone by. In previous generations, big oil represented big business. If you wanted to get anywhere, you had to pay up. And while I’m no conspiracy theorist, let’s just say that major players like Chevron are never going to complain about pain at the pump.
However, this narrative took a massive hit when electric vehicles began capturing mainstream attention. I believe a significant (though not expressly stated) catalyst for EVs is the fact that consumers are tired of major corporations unilaterally dictating terms. With the electrification of transportation, drivers no longer need to rely on private infrastructure. They can just “refuel” at home. Great news for the average person, not so great for CVX stock and its ilk.
Still, economic viability matters. For now, EVs remain too pricey for the average household, even including federal subsidies (which won’t last forever). As a matter of practicality, oil stocks are still relevant. Therefore, CVX is a name to keep in mind as we head into the busy summer season.
Exxon Mobil (XOM)
Exxon Mobil has the ignominy of being the second-to-last-man-standing, behind rival Chevron. In August 2020, the Dow gave XOM the boot, largely because of chronic underperformance since oil stocks peaked earlier in the past decade. The stunning growth of technology firms was also a key factor in pushing multiple oil firms out from the venerable Dow.
And of course, let’s not forget the impact of the novel coronavirus. Oil stocks of all stripes took the beating of their lives, particularly when oil prices dropped below zero. That wasn’t the primary reason for Exxon’s ouster, but it definitely didn’t help.
Still, the ejection could be a blessing in disguise for XOM stock. According to a 2018 Barron’s article, many companies have performed well after getting the boot:
“Since 1999, 17 stocks have joined the venerable 30-member index and 17 removed. According to the WSJ Market Data Group, the average performance one year after being added to the Dow is minus 8%, while the return is almost flat—negative 0.6%—after ejection. The performance differential is especially notable more recently: The last five changes have seen a 3% rise for additions and a 43% rise for those stocks exiting.”
It seems like XOM stock could add another entry to this trend, with net positive catalysts potentially driving up crude oil demand.
Although U.S.-based oil stocks command most of our attention because we’re so familiar with them, the disruptions caused by the Covid-19 pandemic warrant a wider outlook. Case in point is Total. A French multinational integrated oil and gas company, Total is one of the biggest players in the global fossil fuel industry.
For me, an intriguing thesis for TOT stock is the return of tourism to Europe, particularly high-profile destinations like Paris, France. Indeed, Paris consistently ranks as one of the world’s top destination spots. Of course, this concept wasn’t looking too bright earlier this year. In fact, the Wall Street Journal warned in January that Europe faces a bleak 2021 regarding pandemic-related woes.
Now, the New York Times is reporting that under certain conditions, the European Union will allow vaccinated U.S. tourists to visit this summer. Logically, this is significant for TOT stock in that a potential uptick in demand is arriving in its underlying key markets. Moreover, the EU is adjusting its policy right when the busy summer season occurs, aligning very well with Goldman Sachs’ optimistic forecast.
If you want to take an extremely contrarian position on oil stocks, you may want to consider Russian energy giant Lukoil. Heck, even if you’re not a contrarian but simply want to hedge your crude bets with something else from the sector, LUKOY stock could give you the protection you want.
Of course, when you’re dealing with Russian investments, you want to be careful and make sure to do your homework. Frequent tensions between the U.S. and Russia can introduce geopolitical variability that many traders would rather avoid.
Still, Lukoil is one of the more intriguing oil stocks to buy because it’s an area where relatively few are looking. For instance, Bloomberg reported in February 2021 that the Russian energy sector was enjoying a valuation bump as they anticipate President Biden’s push for green energy driving up demand for Russian equities.
Currently, the threat is that Russia could take aim at the American independent energy sector with artificially deflated prices. If so, this would lead to a longer-term catalyst for LUKOY as investors rotate out of the independents, perhaps into Russian oil stocks. It’s a risky idea though, so proceed with extreme caution.
Philipps 66 (PSX)
Nobody wants to speak too soon regarding the coronavirus pandemic. But looking at the latest data from the Centers for Disease Control and Prevention, new Covid-19 infections continue to decline. So long as it stays that way, the market environment looks quite attractive for Phillips 66, particularly its fuel distribution business.
That being said, no matter how much new Covid cases decline from here, the psychological impact will linger for some time. I’ll provide a quick anecdote.
I was at my local CarMax (NYSE:KMX) dealer and when it was time to greet the appraiser, there was that awkward moment when typically, you would shake hands.
What are we supposed to do in the meantime, bump elbows? I have no idea. It’s just weird.
I tell this story as a microcosm for the wider world: the novel coronavirus has transformed the way we think about the world on even the smallest level, how we greet each other. It seems likely that as the summer season opens up, more people will choose to drive to their destination rather than fly with a large group of passengers that could potentially expose them to Covid-19.
While air passenger volume has picked up substantially, it’s still not 100% back to pre-pandemic levels. This dynamic should see many more millions of cars on the road, which bolsters the case for PSX stock.
TravelCenters of America (TA)
Nothing quite says ‘Murica quite like TravelCenters of America. Big trucks, big personalities and big portions of hearty gas station food. If a person who had never visited the U.S. were to ask me what America was really all about, I’d direct them to photos of TravelCenters of America.
All light-hearted jokes aside, the underlying business of TA stock is extremely important. Primarily serving the needs of the truck driving community, you could view TravelCenters as one of the bellwether names among oil stocks. Particularly in this crisis, if demand for shipped goods is rising, we should see higher share prices for TA.
Admittedly though, this equity unit is a bit on the riskier side. Whether you want to take a shot will depend on your belief in the economic recovery narrative. For instance, the personal savings rate is near all-time highs, which suggests consumer fears (i.e. deflation). On the other hand, the high saving rate suggests that consumers have plenty of cash to deploy.
Should confidence comprehensively return to the economy, activity will rise, boding well for TA stock.
Marathon Oil (MRO)
One of the biggest names among independent oil stocks, Marathon Oil may be impacted if the Russians decide to play hardball with crude prices. Hopefully, that’s just typical geopolitical chatter and nothing comes of it. Nevertheless, if such a disruption does come to pass, MRO stock is well-equipped to handle serious headwinds.
First, the company’s latest earnings report for the quarter ended March 31, 2021, was very impressive. Non-GAAP earnings per share came in at 21 cents, almost double consensus estimates of 11 cents. Furthermore, Marathon posted revenue of just under $1.18 billion, up $60 million against estimates and representing an improvement of 15% over the year-ago quarter.
Second, investors should recognize that these results came from a troubled economic environment. There was the Texas winter storm that devastated so many, essentially shutting down oil production in the region for several days. And you still had the uncertainty of the Covid-19 crisis, with several jurisdictions still imposing strict mitigation measures.
But now that Covid cases are declining and summer weather will soon be upon us, MRO stock seems like a worthwhile upside bet.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.