Let’s address the giant pink elephant in the room regarding oil stocks to buy: hydrocarbon prices are falling like a rock. According to a recent CNBC article, U.S. crude oil fell below $70 a barrel, closing at the lowest level since June. Also, Axios pointed out that record domestic oil production helped spark the sector-wide deflation.
So, it then leads to an obvious question: why bother with oil stocks to buy? On relative financial/investment terms, hydrocarbon players are undervalued. Yes, we can talk all day about renewable energy solutions. However, fossil fuels leverage the incredible scientific power of energy density. That will never go away unless the laws of physics somehow shift.
Fundamentally, though, the geopolitical environment continues to worsen. To be fair, major oil producing nations standing ready to deepen production cuts in the first quarter of 2024 haven’t resulted in much of an upward shock in prices. However, I also believe you’ve got to look at the long game.
Obviously, the situation in the Middle East is tense, sparking ideological conflicts throughout the world. Also, Russia’s invasion of Ukraine shows no sign of abating. With headwinds stubbornly marching higher, speculators may want to consider the below oil stocks to buy.
Chevron (CVX)
At the moment, Chevron (NYSE:CVX) might not appear a viable candidate for oil stocks to buy. Since the beginning of the year, CVX fell 18%. Since Oct. 19, the situation hasn’t look auspicious for the integrated oil giant. However, I’m going to step away from the noise and take a look at what the alpha dogs of Wall Street think. After all, they move the market – not some random voice on the internet.
Interestingly, Fintel’s options flow screener – which targets exclusively big block transactions likely made by institutions – reveals recent acquisitions of sold puts. In particular, a major entity or entities sold 6,800 contracts of the Jan 19 ’24 170.00 Put. For those unfamiliar with the lexicon, the trade (at face value) assumes that by the expiration date of Jan. 19, 2024, CVX will not materially drop below the $170 strike price.
Yes, CVX closed at $142.53 on Wednesday. However, the option trader collected a premium of $11.925 million for underwriting the risk. Therefore, as long as CVX doesn’t dip meaningfully below the $143.515 transaction price, the trader will win. That’s a bold bet that may augur well for Chevron.
ConocoPhillips (COP)
A multinational corporation focused on hydrocarbon exploration and production (upstream), ConocoPhillips (NYSE:COP) admittedly seems risky as a candidate for oil stocks to buy. True, the year-to-date loss of a bit over 2% seems relatively reasonable. However, in the past five sessions, COP dropped almost 5% of equity value. Still, it might be worth keeping on your radar due to a possible short-covering mechanism materializing.
From late November to Wednesday, institutional investors have been selling COP call options. The underlying strike prices range between $116 at the low to $120 at the high. It’s hard not to notice that these are fairly aggressive wagers. Keep in mind that COP closed the midweek session at $110.52. Yes, momentum is negative, which is likely what inspired the bearish trades. Still, it’s risky.
Basically, the difference between the current price and the high-side strike is about 8.6%. So, a sudden surge in sentiment could see options traders cover their short calls, which may be bullish for COP. Also, it’s not always a great idea to short a security which features a strong buy rating.
Williams (WMB)
A midstream operator, Williams (NYSE:WMB) on paper makes a solid investment under any circumstance. No, it’s never purely insulated from economic forces obviously. However, as it’s heavily involved in energy storage and transportation services, it’s the lifeblood of the economy. That’s probably not going to change anytime soon given the aforementioned energy density of fossil fuels. For that reason, it’s one of the oil stocks to buy.
Further, Wall Street appears to agree, sending WMB up more than 11% since the January opener. However, it’s also possible that further gains can materialize. Looking at the security’s options flow, we find that bears have apparently targeted WMB for future declines. Specifically, a major entity (or entities) sold 27,014 contracts of the Jan 19 ’24 32.00 Call on Wednesday. At the time of the transaction, shares traded for $35.87.
That seems awfully aggressive given the premium paid of $1.14 million. Yes, WMB slipped recently, which likely inspired the bearish wager. Still, a few good sessions may be enough to spark a short covering.
Kinder Morgan (KMI)
Another top-flight midstream operator, Kinder Morgan (NYSE:KMI) benefits from the same fundamentals as Williams. Basically, Kinder represents a vital component of the economy thanks to its vast network of pipelines and terminals. However, it’s relatively undervalued compared to WMB, with shares down almost 3% since the January opener. Is that enough to make it one of the oil stocks to consider?
To be upfront, Kinder Morgan represents a tricky proposition. It’s true that bears are betting against KMI. However, recent transactions show that institutional traders are buying puts instead of selling calls. At face value – assuming that these trades aren’t part of a complex, multi-tiered strategy – the bought puts don’t have an obligatory consequence; that is, one “merely” loses the principle in buying the puts.
However, what’s interesting is that the implied volatility (IV) curve of KMI shows heightened interest in far out-the-money (OTM) calls. That’s unlike many other oil stocks, which feature heightened IV toward the deep in-the-money (ITM) calls. So, options traders could be anticipating upside, which may upset the bears.
Phillips 66 (PSX)
Although Phillips 66 (NYSE:PSX) represents a laggard among downstream operators, it enjoys one major catalyst: the attention of Paul Singer of Elliott Management. As I reported earlier, the activist investor bought up a significant stake in PSX stock. In turn, it’s urging for significant changes to help unlock value. So far, the pressure seems to be working. Since the start of the year, PSX gained nearly 24%.
Conspicuously, in the trailing month, PSX returned about 10% of equity value, delighting patient long-term stakeholders. Even better, it’s quite possible that shares can continue their impressive rally. Yes, the spotlight from Elliott Management undoubtedly inspires the wheels to turn faster. However, sold calls that were placed months ago now risk getting blown up. If the bears don’t cover, they could face financial consequences.
Interestingly, other institutional bears seem unperturbed with the rise of Phillips 66. On Dec. 1, major entities sold 3,416 contracts of the Feb 16 ’24 135.00 Call. That seems a risky bet because the delta between the strike and Wednesday’s close is only 8%.
Valero Energy (VLO)
Another downstream petroleum company, Valero Energy (NYSE:VLO) focuses primarily on manufacturing and marketing transportation fuels and other petrochemical products. Since the start of the year, VLO moved up modestly, a bit over 2%. However, in the trailing five sessions, VLO slipped almost 2%. With circumstances not working in Valero’s favor (given the record domestic production), the bears put VLO in their crosshairs.
If we learned anything from the post-Covid-19 market ecosystem, you can never be too comfortable holding a bearish position. Nevertheless, some institutional investors are throwing caution to the wind. On Tuesday, a major trader bought 1,006 contracts of the Dec 15 ’23 120.00 Put. But the real star of the show when it comes to pessimism is the 1,001 contracts sold of the Jun 21 ’24 120.00 Call.
At the time of the transaction (on Nov. 20), VLO traded hands at $124.79 per share. As of Wednesday’s close, the price slipped to $122.73 so the bear is winning for now. However, all it takes is a bit of positive momentum to return and this bear trade could get blown up.
HighPeak Energy (HPK)
An independent oil and natural gas company engaged in the acquisition, development, and production of various hydrocarbon reserves, HighPeak Energy (NASDAQ:HPK) offers a relevant business on paper. However, in reality, it’s one of the riskiest oil stocks. Since the beginning of the year, shares lost almost 38% of their equity value. In the trailing five sessions, they slipped almost 10%.
That about tells you all you need to know about HighPeak. Nevertheless, for contrarian speculators, the narrative could be enticing. First, according to Fintel’s options flow screener, an institutional investor bought 931 contracts of the Jan 19 ’24 17.50 Call, paying a premium of $24,450 in the process. That’s arguably a reasonable OTM bet considering that shares closed at $14.46 on Wednesday.
Second, HPK might be a short squeeze in the making. Per Fintel, HPK’s short interest stands at 24.76% of its float. Moreover, its short interest clocks in at 12.55 days to cover. That means that based on average trading volume, the bears will require almost 13 business days to unwind their wagers.
All it takes is a nudge and the pessimists could be having a bad day.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.