To me, it’s almost like having a car full of children on a road trip. Inevitably you’re going to get that question and it’s not a matter of if but when and how many times? On the road that annoying question is “Are we there yet?” In the investing world, specifically with oil, it’s worded a different way but elicits a similar emotional response, “Have we bottomed?” In short, no.
The water’s not warm enough. Go ahead a stick a pinky toe in it. It’s cold in there. This oil market has a glut of supply and a rigs going offline isn’t enough to stop that problem. As companies are taking rigs offline they are increasing the efficiency of their existing rigs. So the amount of oil is likely to stay relatively constant, even though the number of rigs operating may be dropping.
But on the technical side you’ve got what can only be described as a dead cat bounce. I always figured dead cats would be too stiff to bounce, but I didn’t make up the metaphor. Nor do I throw dead cats to test the thesis. We’ve gone from the $107s on crude in June 2014 all the way down to $43.58 at the end of January. Since then, oil has rallied a bit, getting up to $52.86 Monday.
If you’re looking to catch the falling knife by jumping in ahead of the curve into oil stocks, be prepared for it to get worse before it gets better. When the analysts start to believe the bottom is in then you’ll see them change their earnings estimates to the upside in preparation. Right now the opposite is happening and estimates are still coming down, just like they are on today’s Bear of the Day, BP (NYSE:BP).
Estimates have been decimated for the current year. Just 90 days ago the Zacks Consensus Estimate was $4.23 for BP. Now, after six analysts have come in and revised their numbers to the down side the consensus has dropped all the way down to $2.19. While the current quarter, next quarter and next year consensus number have all declined, the current year is the most extreme. Add that to BP’s latest quarterly earnings miss, coming in at 74 cents versus the Zacks Consensus Estimate at 82 cents, and you have the reason for its Zacks Rank #5 (Strong Sell) rating.
Of course, I’m not telling you anything groundbreaking or earth-shattering right there. All you had to see to know that BP was in trouble was their stock chart. After trading near $54 a share in July, the stock has sold off consistently, bouncing off a bottom at $34.88 in mid-December before recovering to the $41.61 level it closed at Monday.
The November 3rd, 2014 high at $43.08 should provide heavy upside resistance for the stock should the march continue higher. The level it hit intraday during trading Monday is very close to the 38.2% Fibonacci retracement of the move from the June highs to the December lows. With indicators like the commodity channel index already overbought, this could be the end of the short term bullish run.
Investors looking to invest in oil companies should try and turn their eyes towards the refiners. In that industry World Fuel Services (NYSE:INT) is a Zacks Rank #1 (Strong Buy) andMurphy USA (NYSE:MUSA) is a Zacks Rank #2 (Buy).