Lately a bunch of folks have asked me this question: Is now the time to buy energy stocks on the dip? And I understand why people are asking this; pretty much the entire energy sector has fallen off a cliff, and this has brought out the bargain hunters. However, are energy stocks really the bargain that people are looking for? I’ll answer this question in today’s blog.
First, I want to begin by looking at the state of the economy. We’re facing global growth worries that are being fueled by Saudi Arabia and Iran, who have discontinued diplomatic relations and are fighting a proxy war in Yemen. Both countries are continuing to pump oil at a frantic pace, and since they refuse to slow down, it seems unlikely that other OPEC members will agree to cut production.
The U.S. is feeling the impact of this. Our massive crude oil facilities in Oklahoma are nearly at capacity, and major oil companies have completed projects in the Gulf of Mexico that will only increase the oil glut in North America. If we don’t export large quantities of oil soon, crude oil prices could fall even further.
Unfortunately, it looks like we’re going to work hard to keep that from happening. China’s slowing economy and currency devaluation have investors worried, and as the dollar continues to gain strength, U.S. markets are at an increasing disadvantage.
There is good news in the midst of this, though: Congress recently passed a controversial budget bill that lifted the 40-year ban on crude oil exports. Two tankers have already left from Texas ports, and more shipments are expected soon. So hopefully, we can use this to balance out our crude stores.
In the meantime, though, energy stocks are not the place to be. Natural gas prices are near 14-year lows, and crude oil is at a 12-year low. Kinder Morgan recently cut its dividend by 75% to help preserve its credit rating, and I would not be surprised if more energy companies follow suit.
Given the current global conditions, there’s no doubt that crude prices will stay low for the foreseeable future. So it’s not surprising to me that energy stocks dominate the F-rated stocks in both Portfolio Grader and Dividend grader. There’s just too much downside risk in the market for these positions to be anything but a sell.
So, I advise everyone to continue to avoid energy and commodities stocks. Instead, I’m loading up on consumer stocks that are benefitting from falling oil prices.