The New Paradigm For Oil Stocks?

Some traders in the oil stocks sector will tell you that they don’t care if the market is up or down, they just want it to move. In May of 2017, the VIX, commonly known as the market’s fear index, had its lowest rating since 1993.


Source: TradingView

That said, volatility in the S&P 500 is relatively low, when compared to its volatility over the last 10 years. However, some sectors, like oil, have been experiencing greater volatility and could potentially offer more trading opportunities.

Here’s a look at the historical volatility and IV Index mean of the SPDR S&P 500 ETF Trust (NYSEARCA: SPY).



Now, compare this to the United States Oil Fund LP (NYSEARCA: USO)



As of May 21, 2017, the United States Oil Fund ETF was 3 times as volatile as the SPDR S&P 500 ETF, based on the implied volatility, or the IV index mean.

Now, you’ll want to keep in mind the factors that influence the price of oil stocks, which include geopolitics, supply and demand, public policy, and economics. For those who tend to have a more macro view on the markets, trading oil stocks can potentially be a good fit.

That said, the American Petroleum Institute breaks down the industry into these sectors: upstream, downstream, pipeline, marine, service and supply.


Companies that are in the upstream sector deal with exploration, development, and production of crude oil or natural gas. For example, Houston-based Cobalt International Energy, Inc. (NYSE: CIE) fits in this category. The company operates oil and gas exploration and production in the U.S. Gulf of Mexico.

Larger companies in this sector include ConocoPhillips (NYSE: COP) and Exxon Mobil Corporation (NYSE: XOM)


Now, when you’re talking about tankers and refineries, they are referred to as downstream companies. For example, CVR Refining, LP (NYSE: CVRR) is an independent petroleum refiner of transportation fuels. It operates a full coking medium-sour crude oil refinery in Kansas.

Valero Energy Corporation (NYSE: VLO) is one the largest players in this arena with a market cap north of $25B.


 Some oil companies deal with pipelines, such as petroleum and liquid CO2. One of the leaders in this category is Kinder Morgan, Inc. (NYSE: KMI). The company owns interests in or operates approximately 84,000 miles of pipelines and 155 terminals. The Houston-based firm has a market cap north of $43B and is the largest independent transporter of petroleum products in North America, transporting roughly 2.1M barrels per day.

Kinder Morgan

Source: Kinder Morgan


Firms that deal with the purchasing, storage, distribution and transportation of petroleum by water are referred to as marine fuel companies. For example, Aegean Marine Petroleum Network Inc. (ANW) physically supplies and markets refined marine fuels to ships in port and at sea. Some of its accomplishments include being recognized as the largest independent physical supplier and having the biggest private fleet of bunkering tankers.

Service and Supply

The fifth category recognized by the American Petroleum Institute is service and supply. This is a broad sector which could range from consulting to equipment.

National Oilwell Varco, Inc. (NYSE: NOV) helps drilling companies by providing tools to make better decisions. Its NOVOS platform automates simple tasks allowing operators to focus on the more important decisions.


Source: National Oilwell Varco, Inc.

How Big Is The Oil Stocks Space?

 On June 6, 2017, the space had a market cap of $3.37 trillion, according to Fidelity. This immense market cap comes from two industries: oil, gas and consumable fuels, which accounts for $3.07T of the energy sector; and energy equipment and services, which makes up $296.79B of the sector.

However, those industries have multiple subindustries. For example, the oil, gas and consumable fuels industry includes subindustries such as, Integrated Oil & Gas; Oil & Gas Exploration & Production; and Oil & Gas Refining & Marketing, just to name a few. Additionally, the energy equipment and services industry includes companies engaged in oil and gas drilling, such as contractors and owners of drilling rigs. The oil and gas industry is pretty big, and there could be a plethora of trading opportunities, if and when, crude oil and gas prices are in motion.

Key Drivers of Oil Prices

Now, if you’re considering trading oil- and gas-related stocks, there are some factors you’ll want to keep in mind. Like all commodities, oil and gas prices are driven by the supply and demand the commodities. With traders becoming more focused on the level of U.S. crude oil inventories, you’ll want to watch the EIA Petroleum Status Report on Wednesdays at 10:30 AM ET. Additionally, you would want to keep an eye on the EIA Natural Gas Report on Thursdays at 10:30 AM ET. That in mind, you would want to see whether these figures rise or fall more than the consensus estimates, as well as the prior changes in inventories.

Not only that, but you would want to take into account geopolitics, as they could affect the prices of crude oil and gas. Moreover, macroeconomics, as well as the U.S. dollar should also affect prices.

The Bottom Line For Oil Stocks

The level of volatility in the markets are relatively low, but the oil and gas industry has been experiencing some volatility, and that could continue to stick around. That in mind, there is a multitude of factors you’ll need to take into account, if and when, you start trading oil and gas stocks. When you’re trading these stocks, you would want to take into account macroeconomics, supply and demand of crude oil and gas, macroeconomics, the U.S. dollar, and geopolitics, as well as company specific news, just to list a few.







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