The price of oil jumped 5% yesterday. This morning, it is down over 2%.
I’ve got oil traders who are telling me the bottom for oil was set in January and we have been going up since then. Maybe, but I don’t count that as a technical bottom just yet.
Below is a two-year oil chart. As you can tell, the up-trend was broken in July of 2014. Over the following six months, the bottom fell out.
In January, we had a relief rally, or dead cat bounce, and the start of a consolidation, or sideways pattern.
The problem is that the March bottom was lower. And yesterday’s high was lower than the February high. Lower highs and lower lows is the definition of a bear market.
In other words, I’m not buying oil here until it breaks that middle trend line at $50. That could easily happen. If it does, I’ll be buying USO option calls into the $55 to $60 range dated out three months. This move would also line up with summer driving season.
Rally Time — Excellent!
Yesterday’s oil price rally was based on the fact that oil production fell for the first time since January — though the decline was a measly, insignificant, puny 0.4%, or 36,000 barrels a day out of a total 9.2 million barrels a day.
And still crude oil stockpiles rose for the 12th week to 471.4 million barrels. Cushing, Oklahoma — the major crossroads of U.S. oil pipelines — is said to be 70% full and at the highest level on record.
Though in truth, Cushing will never fill up because it can and is sending oil to the Gulf to be stored on supertankers — which is why I own companies like Nordic American Tanker (NYSE: NAT) in my trading service Crisis and Opportunity. NAT is hitting 52-week highs after nearly doubling this year.
On the other hand, the Oil Volatility Index (OVX) isn’t hitting new highs, which would suggest that the smart money is betting oil will trend lower from here. Triggers that could send oil lower include some sort of deal with Iran that ends the UN sanctions and continued pumping by Saudi Arabia and Russia.
Iraq is hitting 30-year production records over 3 million barrels a day, and it look like they will hit their goals of 6 million barrels a day by 2018.
That said, there are oil-related companies I want to own now.
Here is the Philly Oil Service Index (OSX). It is made up of 15 companies like Schlumberger (NYSE: SLB), Transocean (NYSE: RIG), and Golar LNG (NASDAQ: GLNG). This index has dropped by about 45% this year.
As you can tell by this chart, the downtrend has been ruptured. There is a double bottom, and the MACD has crossed below the zero line.
This is bullish. Even if you don’t drill new wells, you still have to pump and maintain existing wells. Oil service companies still get paid.
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Holding Out for a Hero
One of the most interesting stocks in this sector is Hercules Offshore (NASDAQ: HERO). The company provides shallow-water drilling and marine services to the oil and natural gas exploration and production industry worldwide.
Seven years ago, HERO was a $43 stock riding the commodity super-cycle. Today, it is at $0.53.
The stock has been taken to the woodshed and beaten like a redheaded mule.
But something funny happened on the way to bankruptcy: The company signed a five-year deal.
According to the press release:
Hercules Offshore (NASDAQ: HERO) announced that it has signed a five-year contract with a subsidiary of Eni S.p.A. for use of the Hercules 260 in West Africa. The dayrate under the contract will range from a minimum of $75,000 per day when the price of Brent crude oil is $86 or less per barrel, to a maximum of $125,000 per day when the price of Brent crude oil is $125 or more per barrel. Contract commencement is expected in early April 2015. Costs for contract specific upgrades will be reimbursed by the operator.
The share price jumped 17% in a day.
Undervalued
Even after the jump in share price, HERO has a market capitalization of just $84 million.
For those new to investing, a market capitalization, or “market cap,” is the number of shares outstanding times the price per share. It gives you the true market value of a stock.
There are other numbers that say HERO is priced for Armageddon. The company has a price to sales of just $0.08, compared to Transocean’s $0.60 or the industry’s $1.12.
HERO also has a price to book of 0.12. Theoretically, this means you buy all the shares and sell off everything that HERO owns and net an 88% gain.
Don’t get me wrong; the company has a lot of debt and lost $200 million last year. There are risks.
That said, if you were looking for a nice speculative investment with the potential for a massive return, HERO looks pretty good.
All the best,
Christian DeHaemer
Check us out on YouTube!Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.
