Recently, I wrote an article on the three big oil companies Exxon Mobile (XOM), BP, and Chevron Corp (CVX) with ideas on how to make option trades on the stock. Well, I still have time decay in my favor on the stocks but so far they are all wrong. I should have noticed how far Exxon came down before I considered that short income trade. It dropped faster than normal and I should have known it would bounce back after a move like that. The stock did bounce back. Longer term, it is still bearish so I may make out in the long run since my trades can go through September. But this got me thinking. If these stocks are in a bearish pattern and the lower they go the better the price gets for entry, how can an investor know when to get into the stock?
We do know that when oil prices rise, usually the oil stocks rise. For this reason there are a number of factors an investor can look for in the economy that can have a large affect upon the direction of the oil stocks. If one keeps abreast of these things, finding an entry point should be a good move. Here are a few to consider:
Lower Crude Inventories in the U.S.
It is a fact that as inventories in the U.S. rise, it means that demand goes down and less oil is being consumed by the populous. Every time, this has driven the cost of oil down. We can follow this over the last couple years. In April of 2010, oil prices slid to almost $82 a barrel as U.S. Crude inventories grew. In September of the same year it had slid to $72 a barrel on continued rising inventories. Oil fought back and was on the rise, but retreated back to $87 as inventories rose again. We can also read that just under a year ago, in August of 2011, oil started up in price because petrol inventories sank 3.5 million barrels, which was far more than forecasts of a 1.2 million barrel drop, and indicated keen demand. So we can see that oil prices are often influenced by U.S. Crude reserves and if we watch a pattern we might be able to observe a steady pick up in use again. This will certainly influence oil stock prices.
World Economic Events
It is a common catalyst to have economic woes in different regions of the world affect oil prices. Presently we have two regional economic events that we have been tracking for a couple years. European debt and to a lesser extent-China's economic slowdown. Summer, 2010-the euro crisis was driving the market down and influential in helping oil fall to $80 a barrel. The main concern was the stalling economy that meant less oil being consumed. A year later, oil prices were falling again on the same concern of a European economic crisis, which would diminish the demand for energy use. Back in January of 2011 when China started to tighten measures and rumors of it raising interest rates because of its slow down, oil prices were kept at bay.
See how oil prices can be influenced by economic news. Looking for changes in China's economic condition and an end to the Euro crisis could also mean long term bullish trends for oil stocks.
Instability in the Middle East
This can be a number of regional events together that could cause crude prices to rise. The best way to look at these is to observe conflicts in the region and guage how long they will be there. The length of influence may not be as long on this but it is important. In February of 2011 we had the crisis in Libya, Yemen and protests in Iran that influenced a rise in oil prices. At the same time, the stability that we are finding today after the conflicts contributes to lower prices. Since this region produces so much of the world's oil, observing what is going on is very important.
If an investor is looking for a time to invest in oil stocks like BP, Chevron, or Exxon Mobil, observing these three elements, which influence the price of crude, will go far in helping one pick a good entry point that may lead to a long-term bullish move and quite a profitable run for the investor.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.