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The price of oil has recently been supported by at least two major factors: The Federal Reserve's announcement of QE 3, which has sparked hopes for a stronger economy as well as the fear of inflation due to money printing. The other major factor that is supportive of oil is the ongoing tensions in the Middle East, in particular, Iran's continued development of a nuclear program. However, since the QE 3 announcement that initially caused a spike, the price of oil has actually dropped about 9% in just about 4 weeks. That means that in spite of Iran and QE 3, other factors appear stronger and likely to keep bringing oil back down to earth. The two major issues that seem to be trumping oil's upside potential are an abundance of supply and a synchronized global slowdown. Here is a closer look at those two factors which could be poised to take oil and stocks much lower in the coming months.

First, let's consider the supply situation, since supply and demand are often the biggest factor in determining price. Oil production in the United States is now at a 15 year high, and additional production is poised to come on the market in 2013. A number of oil market experts have recently turned bearish due to a supply and demand imbalance. For example, Tom Petrie, the Chairman of Strategic Energy Advisors believes that oil is heading lower, especially as we head out of the Summer driving season. A recent CNBC article states:

On the crude side, we're amply supplied. It probably gets bigger next year. We've had a big insecurity premium in the price of oil for most of the year, $15 to $20. That gets eroded in the next three to six months." Prices, he said, could drop to $70 per barrel. 'I think we test into the 80s, low 80s and into the 70s before it's over.'

Now let's look at what appears to be a developing synchronized slowdown in the global economy. Europe is dealing with a debt crisis that still poses threats to the financial system. This could lead to the breakup of the Euro zone, and a financial meltdown. China, which had been one of the fastest growing economies, is now seeing a slowdown due in part to reduced exports to Europe and other parts of the world. Recent economic data shows that the United States could also be heading for recession, and that could be accelerated soon with a looming fiscal cliff. The Chicago Purchasing Managers Index recently dropped below 50, which is the lowest level in about 3 years. A number of companies that are economic bellwethers including Caterpillar (NYSE:CAT) and Federal Express (NYSE:FDX) also recently cut profit forecasts due to lower product demand.

If things are slowing down in the U.S. now, just imagine what will happen on January 1, 2013, when many taxes ranging from payroll taxes, income taxes, dividend and capital gains taxes are scheduled to rise. Plus, the government is poised to cut spending in 2013. Even if President Obama and Congress agree to a deal to avert the "fiscal cliff", chances are strong that taxes are going to go up and government spending will be curbed. Countries in Europe that have cut spending and raised taxes have seen a decline in economic activity, and some form of austerity is coming to America soon. When that kicks in, the economy could go into recession and drag the price of oil down further. Selling oil stocks now and waiting for what might be a significant pullback, could be a smart strategy to consider for these oil stocks:

BP plc (NYSE:BP) shares are trading at the upper end of the recent trading range, which could make this an ideal time to sell the stock and wait for a significant pullback. In June, BP traded around $36 per share, and a correction to that level would be a more ideal entry point. BP shares could be pressured by the global macro issues that appear poised to deepen in the coming months. The stock is also susceptible to headlines regarding the oil spill liability and any potential settlements. Recent reports indicate that the U.S. Department of
Justice and BP could be close to a settlement, however, the terms of the proposed deal are causing backlash from some state officials and other parties. That means it could take more time than many expect to get a settlement deal that won't immediately be the subject of further controversy and perhaps continued litigation.

However, the biggest risk to the price of BP shares could now be the price of oil, and with supply coming on strong, it seems like the path of least resistance will be lower. Another drop to the $36 level would be worth taking advantage of, since BP seems to be managing the oil spill liabilities.

Here are some key points for BP:
Current share price: $41.84
The 52 week range is $36.25 to $48.34
Earnings estimates for 2012: $4.79 per share
Earnings estimates for 2013: $5.61 per share
Annual dividend: $1.92 per share which yields about 4.6%

Marathon Oil Corporation (NYSE:MRO) shares are also trading at the top-end of the recent range. This stock is now at nearly $30, but it was trading for about $23 per share in June. A re-test of those levels seem reasonable if the U.S. experiences a recession and increased oil production. The U.S. oil market already well supplied, so the combination of reduced economic activity and even more production expected in 2013, could mean that investors should take profits now. That might position investors to take advantage of what should be much better buying opportunities. Furthermore, at current prices, this stock seems overvalued relative to some stocks. While some small to mid-cap oil stocks are trading for 6 to 7 times earnings, Marathon shares trade for about 9 times earnings and only yield just over 2%, while major oil stocks like BP offers a yield of nearly 5%.

Here are some key points for MRO:
Current share price: $29.38
The 52 week range is $23.17 to $35.49
Earnings estimates for 2012: $2.67 per share
Earnings estimates for 2013: $3.35 per share
Annual dividend: 68 cents per share which yields 2.3%

Exxon Mobil Corporation (NYSE:XOM) shares recently hit new 52-week highs, but that did not last long, and the stock looks poised to drop further. Exxon stock trades at about 12 times earnings, making it one of the most expensive of the major integrated oil stocks on the market. It also has one of the lowest dividend yields at just 2.5%. For example, Chevron looks like a better value with a P/E ratio of about 8.5 and a dividend yield that is around 3.2%. Another factor to consider is that Exxon is the largest producer of natural gas in the U.S, and even though that commodity has been rising, it is still not producing strong returns. Plus, natural gas has only recently seen a sharp rally which means it is too late to have significantly benefited the upcoming 3rd quarter results. That means earnings could disappoint when financial result are reported. Chevron just warned that Q3 results would be substantially below expectations due to lower production and weaker oil prices when compared to the prior quarter. That means expectations might also be too high for Exxon. With the share price at elevated levels, an earnings miss or cautious guidance could send the shares down significantly. That's why it could make sense to take profits in Exxon now and wait for a better buying opportunity, like when this stock fell to about $77 per share in June.

Here are some key points for XOM:
Current share price: $91.03
The 52 week range is $73.90 to $93.36
Earnings estimates for 2012: $7.72 per share
Earnings estimates for 2013: $8.18 per share
Annual dividend: about $2.28 per share which yields about 2.5%

Disclaimer: Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for
informational purposes only. You should always consult a financial advisor.

Source: 3 Oil Stocks To Sell Now And Buy Back Cheaper In The Coming Correction