3 Oil Plays Amid Crude Stockpile Drawdown

Crude stockpiles shrink by over three times more than expected

Data released Wednesday showing a drawdown in crude inventories gave oil and gas equipment stocks a much-needed energy boost. The Energy Information Administration's (EIA) weekly supply report revealed that U.S. crude stockpiles shank by 8.5 million barrels, much more than the 2.6 million-barrel decrease analysts had expected. It marks the seventh straight week of declining inventories. The tightening supply comes even as offshore producers in the Gulf of Mexico have recommenced operations after significant disruptions from Hurricane Barry.

 "These are bullish numbers across the board. The renewed large draw in crude oil is remarkable as U.S. oil production bounced back significantly after (Hurricane Barry)," said Commerzbank oil analyst Carsten Fritsch, per CNBC.

Oil and gas stocks may also find buying interest on news that Organization of the Petroleum Exporting Countries (OPEC) output sank to an eight-year low last month due to a cut by Saudi Arabia, the world's second-largest oil producer. Furthermore, tensions from U.S. sanctions on Iran have compounded recent supply issues.

Let's explore two leading players in the oil and gas equipment industry, along with an exchange-traded fund (ETF) that provides exposure to the space. Those wanting to play rising oil prices driven by dwindling reserves may want to consider these trading tactics.

Baker Hughes, a GE company (BHGE)

Baker Hughes, a GE company (BHGE) formed in 2017 with the merger of Baker Hughes and General Electric Company's (GE) oil and gas segment. The Houston-based company provides integrated oilfield products, services, and associated digital solutions globally. Baker Hughes reported second quarter (Q2) earnings per share (EPS) of 20 cents, beating Street estimates by a penny to deliver a 5.26% earnings surprise. Revenue for the period also topped expectations, coming in at $5.99 billion versus a consensus of $5.55 billion. Analysts have a 12-month price target on the stock at $29.86 – representing a 17.61% premium to Wednesday's $25.39 closing price. Baker Hughes shares have a market capitalization of $26.33 billion, issue a 2.94% dividend yield, and are trading up 19.77% YTD as of Aug. 1, 2019.

The oilfield-services provider's share price pared about 50% of its steep fourth quarter 2018 loss over the first three months of the year. However, since that time, the stock has traded mostly lower over fears of slowing global economic growth. A bullish breakout above a 10-month downtrend line in Wednesday's trading session may act as a catalyst for a move up to key overhead resistance at $30. The relative strength index (RSI) gives a reading well below overbought levels, providing ample room for further upside before a consolidation. Those who take a long position should protect downside with a stop below the 50-day simple moving average (SMA).

Chart depicting the share price of Baker Hughes, a GE company (BHGE)

National Oilwell Varco, Inc. (NOV)

With a market capitalization of $9.19 billion, National Oilwell Varco, Inc. (NOV) manufactures and markets systems, components, and products for oil and gas drilling and production. Although the oil company posted a Q2 adjusted loss of four cents per share, it was narrower than the loss of seven cents per share that analysts had expected. Management credited a solid performance from the Rig Technologies and Wellbore Technologies segments for the better-than-expected bottom-line result. Revenue of $2.1 billion surpassed projections by 2.4% and grew 1.2% from the same quarter last year. As of Aug. 1, 2019, National Oilwell stock pays a dividend yield of nearly 1% and has fallen 6.93% YTD.

Apart from a minor countertrend bounce in January, National Oilwell Varco shares have tracked lower, finding a YTD bottom at $19.57 on June 14. The stock tested that level on Tuesday, July 30, when the company released its quarterly financial results, but it went on to stage a sharp intraday reversal to close the day 11.32% higher. The oil equipment maker's share price now trades above a trendline dating back to October 2018 and the 50-day SMA. Traders who buy at current levels should aim to book profits between $28 and $30 – an area of significant resistance. Think about setting a stop-loss order just under the downtrend line to protect against a possible head-fake trade.

Chart depicting the share price of National Oilwell Varco, Inc. (NOV)

SPDR S&P Oil & Gas Equipment & Services ETF (XES)

Launched in 2006, the SPDR S&P Oil & Gas Equipment & Services ETF (XES) seeks to return investment results that correspond to the S&P Oil & Gas Equipment & Services Select Industry Index. As its name suggests, the fund's benchmark comprises companies in the oil and gas equipment industry. The ETF distributes its $186.7 million asset base relatively evenly across a portfolio of about 40 holdings – no allocation commands more than a 5% weighting. Just over 1.1 million shares change hand per day on dollar volume liquidity of $10 million. An average spread of 0.11% may be too wide to go after intraday scalps, but it suits swing traders who can let profits run to cover trading costs. XES yields 0.98% and has tumbled 5.29% since the start of the year as of Aug. 1, 2019.

The XES share price plunged beneath the June swing low on Tuesday, July 30, before staging an impressive intraday turnaround to create a possible double bottom pattern. A bullish divergence has also formed between price and the RSI, meaning that, as the stock plumbed a new low, the indicator made a shallower low, suggesting fading seller momentum. Those who enter should set a take-profit order somewhere between $10.50 and $11, where the price encounters a confluence of resistance from an major downtrend line and the 200-day SMA. Consider placing a stop near the midpoint of Tuesday's reversal wide-ranging day to protect trading capital.

Chart depicting the share price of the SPDR S&P Oil & Gas Equipment & Services ETF (XES)
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