Going short on exposed oil companies

Going short on exposed oil companies

During 2018 the prices of WTI and Brent crude oil have certainly had their ups, and more recently, downs. This report outlines what will drive the oil prices over the coming months and suggests taking a short position in two energy companies whose stock prices correlate highly with the prices of WTI and Brent crude oil.

The two energy companies are Valero Energy Corporation (VLO) and Phillips 66 (PSX), the former a mid- and downstream oil company and the latter a downstream oil company. Our data study shows that out of the 26 companies analyzed, VLO and PSX offer 220-370 % and 60-135 % leverages respectively in comparison to changes in the oil prices, the most competitive amongst their peers with a criteria for 0.85 correlation to the oil prices.

The markets can expect a growing supply of oil coming years. The reasons for the supply growth are among other things that oil producing nations Nigeria and Libya are stabilizing, the remarkable growth of the US shale oil industry and that the US sanctions on Iran are not hindering Iran’s oil exports as much as previously believed.

Furthermore, global demand for oil will diminish. As a recession looms we will see the energy demand from industries around the world decrease as consumption goes down. Moreover, the US-China trade war continues and puts a wet blanket on the economy, resulting in decreased production. Lastly, as renewable energy production continues to ramp up, demand for oil will shrink.

Analysts: Johan Andersson & Jan Mueller