Who would’ve thought this summer that we’d see rock-bottom oil prices come fall?
If you remember, June of this year marked the breakout of ISIS in Iraq, which — coupled with the deterioration of Libya and Syria — led to the explosion of crude oil prices.
Now, though, prices tell a different tale…
The chart above shows the rise and then steep decline of both Brent (black) and WTI (green) crude oil prices from the beginning of June until now. Brent has dropped by nearly $20, while WTI has shrugged off $15 in the same time period.
And if you regularly read Energy and Capital or just simply follow energy investments, chances are some, if not most, of your oil stocks felt the raw end of this beating.
Simply put, when oil prices are low, stocks suffer. Now that most of the big gains in energy stocks in the U.S. market come from shale oil and gas, any depression in prices like you see above can pinch even the sturdiest portfolios.
Luckily, there are ways to hedge your bets and take advantage of the rapid decline in oil prices while staying in the energy sector.
What’s Gone Wrong
First, a little explanation of why oil prices are so low.
The reasons are twofold…
One, investors and commodities wholesalers are worried about several of the large global economies.
China, for instance, has shown that its astounding economic growth of the last few years may be starting to plateau. And when the world’s fastest-growing market sputters, so too will the prices of commodities like oil, coal, and gas.
Europe’s economy has also been teetering between salvation and collapse for a while now.
Last month, we saw its second quarter numbers, and although they were buoyed by Germany’s growth, other economies like France and Italy weighed on the EU as consumer demand looked like it has peaked.
The second — and probably most important — factor contributing to the drop in prices has been supply.
Despite lower demand from China and Europe on weak economic numbers, no matter what, oil is always in demand.
The price problems come when oil producers continue to produce while prices are low. Saudi Arabia hasn’t slowed production at all even though prices are nearing this year’s low point. In fact, the Saudis even cut prices by $1 per barrel last week in an effort to help battered Asian consumers.
Plus, Libya has been growing production amidst its ongoing civil war, and the U.S., as you know, is basically in a glut thanks to shale plays like the Eagle Ford, where production has been on a tear.
And since most of this oil and gas has to stay in the United States because of the export ban, prices are going to be lower for the short term.
But there are ways around this for investors…
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How to Right What’s Gone Wrong
When you put together low demand in key economies and a surplus for oil producers, prices get hit hard.
The low oil prices mean drillers recoup less money per barrel than they would when prices are higher, which tightens profit margins.
And when oil prices and profit margins take a hit, the bears come out of hibernation and start selling off their portfolios.
Truth is, if you’re an energy investor, there’s no way to avoid this. If anything, it can actually be good for our investments over the long run.
The easiest way to take advantage of the low prices is to fleece the bears. Simply buying oversold oil or gas stocks can be a great way to take advantage now and reap the benefits when the bears realize their mistake and oil prices rebound.
My colleague Keith Kohl has a $1 driller in Texas that’s grossly oversold and should move much higher once the bears turn into bulls again.
And while prices are still low, it can’t hurt to hedge your bets with high-yield stocks.
If you remember, last month I recommended Global Partners LP (NYSE: GLP), an MLP that focuses on the storage of crude oil and petroleum products.
And with demand low and supply high, guess what? Storage is going to stay big.
On top of that, the price has remained relatively steady during the oil sell-off, and the company pays a 6.1% dividend that can always help when your riskier plays take a dip.
So, if you haven’t already, I would suggest you add high-yield energy stocks to keep your portfolio flush with cash. Global is a great way to start.
Good Investing,
Alex Martinelli
With an eye squarely focused on the long-term, Alex Martinelli takes the art of income investing to a higher level within the energy sector. His research has helped hundreds of thousands of individual investors identify well established companies that have a long history of paying out dividends to their shareholders. For more info on Alex, check out his editor’s page.
