Drop in Crude Stockpiles Fuels Oil Stocks

OPEC may extend production cuts and curb supply output further

Investors in oil and gas stocks haven't had much to cheer about this year. Fears of a global economic slowdown brought about by the U.S.-China trade war have kept a lid on the sector. Apart from short-term price spikes, tensions in the Middle East caused by drone strikes and oil tanker attacks haven't helped sentiment either.

However, bargain hunters returned to the sector Wednesday after Energy Information Administration (EIA) data showed an unexpected decline in U.S. crude inventories. Stockpiles shrunk by 4.9 million barrels over the past week, far outpacing the 1.7-million-barrel decline analysts had forecast. "A jump in refining activity and ongoing subdued net imports have helped yield the first draw to oil inventories in six weeks," Matt Smith of ClipperData told Reuters after the release.

Looking ahead, the group could add to yesterday's gains if the Organization of the Petroleum Exporting Countries (OPEC) extends its production cuts or decides to curb supply output even further when the group meets today in Vienna. Furthermore, speculation has grown that a separate group of large oil producers – known as OPEC+ – will agree to deepen existing supply cuts of 1.2 million barrels per day by another 500,000 barrels.

Those who anticipate the rebound in oil and gas stocks to continue should consider trading industry leaders, Pioneer Natural Resources Company (PXD) and Devon Energy Corporation (DVN), along with one of the largest exchange-traded funds (ETFs) to cover the segment – the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). Below, we take a more in-depth look at each and work through several tactical trading ideas.

Pioneer Natural Resources Company (PXD)

With a market capitalization of $21.62 billion, Pioneer Natural Resources explores for and produces oil, natural gas liquids (NGLs), and gas, with operations throughout the southern and central United States. The Texas-based energy giant reported third quarter (Q3) earnings per share (EPS) of $1.99, below Wall Street estimates of $2.02. Meanwhile, revenue slipped 6.1% on a year-over-year basis. Management cited lower energy prices for the lackluster quarterly results. On the plus side, net production for the period increased 9.6% compared to the year-ago quarter. As of Dec. 5, 2019, Pioneer Natural Resources stock offers a 1.43% dividend yield and is trading flat on the year.

Since bottoming out in early August, the oil producer's share price has ground slightly higher. An orderly pullback in November to a four-month trendline provides a suitable entry point for swing traders. Those who buy Wednesday's 5.68% rally from this support area should aim to book profits at $145, where the price may encounter horizontal resistance from a 12-month trendline. Implement risk management by placing a stop-loss order below $125 and raising it to the breakeven point if the fund closes above the top trendline of a broader symmetrical triangle pattern.

Chart depicting the share price of Pioneer Natural Resources Company (PXD)

Devon Energy Corporation (DVN)

Devon Energy is an independent exploration and production company with key assets located throughout North America and Canada. The 48-year-old company pumped out 148,000 thousand barrels of oil equivalent (mboe) per day in the September quarter to deliver an earnings surprise of 36.8% for the period. It expects 2019 full-year production growth of around 20%. From a valuation standpoint, the firm trades at just over 13 times projected earnings, significantly below its five-year average multiple of about 32 times. Devon Energy stock has a market value of $8.6 billion and sports a 3.86% year-to-date (YTD) decline as of Dec. 5, 2019. Investors receive a 1.68% dividend yield.

A mini double bottom confirmed on the Devon chart in early November. At the same time, a bullish divergence formed between the relative strength index (RSI) and price to add conviction to the pattern. Throughout November, the stock consolidated, finding support from double bottom's neckline. Traders who take a long position at current levels should set a take-profit order near $25 – an area price may run into resistance from a downtrend line that extends back to late April. A stop placed beneath the Dec. 3 low at $21.09, offers a risk/reward ratio of about 1:2, assuming a fill at Wednesday's $22.39 closing price ($2.61 profit per share vs. $1.31 risk per share).

Chart depicting the share price of Devon Energy Corporation (DVN)

SPDR S&P Oil & Gas Exploration & Production ETF (XOP)

Formed in 2006, the SPDR S&P Oil & Gas Exploration & Production ETF has an investment mandate to provide similar returns to the S&P Oil & Gas Exploration & Production Select Industry Index. The fund invests its $1.68 billion asset base in a mix of large-, mid-, and small-cap industry names, providing investors with good exposure across the space. Well-known companies in the ETF's top 10 holdings include Murphy Oil Corporation (MUR), Valero Energy Corporation (VLO), and Phillips 66 (PSX). Trading wise, an average penny spread, coupled with a turnover of more than 25 million shares, makes the fund a leader in the segment. A moderate 0.35% expense ratio also makes longer holding periods workable. As of Dec. 5, 2019, XOP yields 1.49% and has slumped 23.75% YTD.

XOP shares have defended crucial $20.50 support since late August. The fund initially broke down below this level on Dec. 3 but quickly reversed back into the support zone Thursday, indicating a possible head-fake breakdown. Furthermore, the past three days have formed a bullish reversal candlestick pattern that closely resembles a morning star. Traders who enter here should target a move up to $25, where price may run into headwinds from the June swing low and falling 200-day simple moving average (SMA). Exit the trade if the fund fails to hold above the morning star pattern low at $19.90.

Chart depicting the share price of XOP.
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