Are Oil Stocks About to Plunge?
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Jonathan Yates
Are Oil Stocks About to Plunge?

According to a recent article in Barron’s by Gene Epstein, “What’s Bearing Down on Oil,” the price of a barrel of oil could be falling about one-third, to the 70s. Should that happen, oil company stocks will drop in cost, too.  As has been detailed in many previous columns on this site, oil firms are excellent long term investments for a variety of factors, and plunging share prices make them even more attractive.

Epstein reports of net short positions developing on oil assets that, according to Steve Briese, who writes a commodity newsletter, are reliable indicators that the price will fall.  Those who establish those short positions are experts on the oil market.  According to Briese, this indicator has been very accurate.  With so much speculation on oil, high short positions will make any drops based on lower demand even more pronounced.

As the chart below shows, this high level of speculation has the exchange traded fund for oil, United States Oil (NYSE: USO), moving in a very volatile pattern.


Should oil fall, major oil company stocks such as Occidental Petroleum (NYSE: OXY), Marathon Oil (NYSE: MRO), Murphy Oil (NYSE: MUR), Hess (NYSE: HES) and others could be dropping in price, too.  That is what generally happens when crude plunges: oil share prices fall along!  Should that happen, investors should look to buy for the long term.

Oil stocks are very solid investments.  There is nothing to compare with oil and natural gas as a fuel source.  Renewable energy efforts have fallen far short.  General Electric (NYSE: GE) just sold off its solar energy operations.

In addition to the tremendous demand for oil that will grow along with global economy, oil companies have generous dividend payouts.  The average dividend for a member of the Standard & Poor’s 500 Index (NYSE: SPY) is around 2%.  Occidental Petroleum, as an example, pays a dividend of 2.90%, almost 50% higher.

So far, the price of oil has been in a bullish pattern.  But the short positions, which were right before, are aligned for a plunge.  Should that happen and oil company stocks fall too, investors should look upon this as an opportunity to build a position for the long term at a discount.




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