Oil Prices Are At Two-Year Lows - Should You Buy Now?

By: Eric Winter of Street Authority

Stock exchanges are not alone in seeing prices pull back lately. In at least one case, however, that is actually a good thing.

Drivers both state-side and abroad have no doubt felt the pain at the pump subsiding this fall. In the United States, many gas stations are now hawking unleaded for under $3.00 a gallon -- a welcome sight in my eyes, at least.

Those lower prices have come at a cost to some portfolios, however.

Oil prices have been steadily declining since making highs in June, falling from north of $104 to around $81 at the time this article was written. Considering that nearly every industry is affected by oil in some way, this means there’s a good chance some of your holdings have fallen in tandem.

Naturally, oil explorers, producers, and those along the supply chain have been hit the hardest. Exxon Mobil Corp. (NYSE: XOM), the world’s largest oil company by revenue, has fallen 11% since July. In contrast, the SP 500 is only down 2.6% in the same time period.

The big question now: have prices reached a bottom, and is it time to go long big oil?

A recent pop in energy stock prices across the board leads me to believe that the answers may be: Yes. Analysts and CEOs are coming out publicly in support of many oil companies during this earnings season, showing that a buying opportunity may be presenting itself in this slump.

This perceived value is making itself known predominantly in beat-down price-to-earnings ratios. Many drillers, service providers and the like are trading at single-digit P/E multiples, garnering the attention of both fund managers and research shops alike.

See below for a list of some energy equities and their forward P/E ratios:

So how can we profit from a potential upswing?

Don't complicate things by trying to pick individual names or playing with futures. I suggest going with an ETF that is heavy on the super majors. Why is that? Simple: the larger oil companies are well-capitalized and have long histories of weathering these cycles.

The Energy Select Sector SPDR ETF (NYSE: XLE) meets that requirement beautifully and also stands out as the largest energy ETF.

XLE peaked in June at $101.52, only to fall to $77.51 just four months later. Since that low, however, the ETF bounced up to $86 in just one week of heavy buying.

Investors are putting their money where their mouths are, with inflows into XLE amounting to $1.1 billion in October so far. In addition, research arms of firms like Bank of America and Jefferies have hit the newswires this past week, reiterating buy ratings in many of the companies that make up XLE.

Ideally, I’d like to see XLE head south towards that $77.51 low again, only to receive more buying and bounce again. This would show that real support exists at that level. I can’t say if oil prices are done stretching just yet, so I see this as a safer entry method.

Risks to Consider: Timing oil markets is difficult -- the commodity is driven by seemingly every factor under the sun. Fundamentals, geopolitics, international regulatory bodies and a slew of other variables all weigh into the price. Waiting to see if XLE heads lower may mean you may miss the trade entirely. But if XLE reaches its recent bottom again and falls through, then investors could be looking at some nasty losses before it levels out again.

Action To Take -- With oil prices now at two-year lows, many analysts and investors are focusing more attention on the commodity. XLE’s recent bounce has me looking for a good entry if buying support holds. In the meantime, I’ll be enjoying a heavier wallet and a fuller gas tank.

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4 thoughts on “Oil Prices Are At Two-Year Lows - Should You Buy Now?

  1. May be a bottom, that will be up to the FR and whether they decide to delay rate hikes or try another QE. Commodities free fall was stemmed by the Fed's Bullard suggesting QE to save the equity markets. Countervailing is the Europe is headed for recession and likely QE while Japan had a surprise rate cut, the major fiat currencies devaluing simultaneously. I'll bet on the Fed saving the stock market and oil. Opinions may vary on timing.

  2. More precised picture and any prediction just can be possible to obtained only after 2nd weak of January 2015, meanwhile in accordance with short term movement, we may found some illusive or falls signals, however, considering medium and long term trend, oil is surely followed with bearish trend, unless it will sustain and traded above $ 108 on closing basis, for three constant days, and with such higher weakly close.

  3. hate to use the "blood in the street" , but everyone is so bearish on Oils. Pundit after pundit is calling the end of oil as we know it! Remember "peak Oil" ! Even Goldman Sach's has thrown in the towel! I think they had a call a few years ago that oil was going to $200.00 - now they say $75. I would not want to be short
    oil at these levels and actually I continue to buy the cheapest of the cheapest oil quality stocks that have lost 50% in their value during the recent carnage of the group. So we have the brokerage firms throwing in the towel ( Stifel downgraded 20 and Goldman Sach's downgraded the price) , the Hedge funds and mutual funds ran for the exit, the individual like usual is always scared to death and the index funds had redeptions and let of not forget the "shorts".. Of course the Middle East is at peace and Winter will never be back and the world economies will flounder for the next 10 years and sure the windmills and solar farms will overtake fossil use.
    The perfect scenario for the Oil Industry collapse ! We are very bullish on the Oil stocks and have been investing for 40 years and my newsletter has been written from 1984 and the past 6 years we have only been in the oils and we now are jumping and have been jumping at all of them ( quality- not overly burdened with debt)
    Top 9 bxe, axas, sn, oas, mauxf, tplm, cazff, cpe mqlxf
    favorite penny oil --5* cazff or caz.to or caza.l .25 worth .80-90 Permian basin play

    Penny oil service company that sells chemical to the Oil and Gas company - turn around and growing by
    30% will grow at least for 12 million to 16+ for 2015 management say they will be profitable and can exceed the estimates. new line of credit and new auditor filing for listing back on OTC BB all for .0174/sh
    symbol espi great penny stock speculation and it is actually a penny!

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