Between late March and June, oil prices traded at lower highs. Vertically integrated energy firms like ExxonMobil (XOM), Devon Energy (DVN), BP plc (BP), and Chevron (CVX) followed that bearish pattern.
The drop caught energy experts off-guard. WTI crude traded at a multi-year high. Pundits predicted that prices would rise to between $150 and $200/bbl. Instead, WTI crude prices closed well below the $70.00 zone at $68.78.
Global inventories dwindled throughout the U.S. Iran conflict. The closed Strait of Hormuz led investors to expect a shortage in the summer. Unfortunately, a small handful of ships crossed the Strait. After the two countries signed a memorandum of understanding, markets priced in for oil supplies to grow from here.
Stock markets are now pricing for a steady increase in oil supply. That might lead to a supply surplus by next year. Risks are growing that energy stocks might re-test their lows not seen since the start of this year. CVX shares, for example, might fall to the $150 - $160 range next.
Valuations in energy stocks are unattractive. The forward P/E might rise as oil prices fall toward $65.00/bbl. Investors should watch for crude prices to hold the $60 - $70/bbl level before starting a position. Energy firms are attractive long-term holdings, since they pay a steady dividend.
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