3 Oil Stocks With Serious Contrarian Potential

All three energy stocks have consistently realized lower volatility

Managing Editor
Sep 29, 2023 at 3:14 PM
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Subscribers to Chart of the Week received this commentary on Sunday, September 24.

Can you really blame the Fed? The central bank’s ‘higher for longer’ interest rate rhetoric kept stocks in a tailspin this week, but running through a list of macro concerns and it starts to sound like a millennial version of ‘We Didn’t Start the Fire.’ Auto workers are striking. Credit card debt has topped $1 trillion. Student loan debt repayment worries are at the doorstep. Gas prices are on the rise again, and we haven’t even gotten to black gold.

Oil prices closed the week near 2023 highs, with West Texas Intermediate (WTI) reclaiming and holding above $90 a barrel and Brent crude sitting at $93 per barrel. In a CNBC interview, commodity trader Mark Fisher speculated that crude could reach triple digits as coordinated production cuts from Russia and Saudia Arabia continue to drive a wedge into prices.

Red-hot commodities have thrown a wrench in the Fed’s inflation plans, which in turn has resulted in broad market equity weakness in the last two months. Yet many oil and gas stocks have been unable to capitalize on the geopolitical momentum within their sector, and instead are a part of the broad market pullback. The good news is there are several oil stocks at either intriguing entry points with bullish implications, or a sentiment backdrop that could favor a contrarian.

Gas Prices COTW

Below is a table curated by Schaeffer’s Quantitative Analyst Rocky White that identifies stocks in the oil, gas, and coal sector with quantified bullish returns after signaling a pullback to a moving average. For the purpose of this study, the stock must be within one standard deviation of the moving average at its last low price (Thursday’s close). The stocks must also be north of the said moving average 80% of the time in the past two months and in eight of the last 10 trading days.

COTW Oil Stock Pullbacks
 
Note the sterling 100% win rate in five ‘signals’ for Chesapeake Energy (CHK), or how Northern Oil & Gas (NOG) even boasts a smaller-framed five-day return. And while there’s a negative return for EQT Corp (EQT), the longer the time frame stretches, the more the return levels out and turns positive. The three stocks could certainly use the boost, with CHK, NOG, and EQT all sporting monthly deficits of at least 6.5%.

CHK, NOG, and EQT are all highlighted for their short squeeze potential as well. CHK’s short interest has increased by 26% since the Aug. 15 report, and 11.5% of the stock’s total available float is sold short. NOG, meanwhile, has seen short interest decrease in the last two reporting periods, yet 9.8% of its total available float is still sold short. EQT is in a similar boat, with shorts in covering mode yet a healthy 7% of its total available float sold short. In all three cases, an unwinding – or continuation of the current unwind, in the case for NOG and EQT – can fuel some upside going forward.

The last thing all three stocks have in common is a possible options trading strategy that could be most prudent. CHK, NOG, and EQT all have a low Schaeffer's Volatility Scorecard's (SVS) of 0, 10, and 2 respectively (out of 100). In other words, all three energy stocks have consistently realized lower volatility than their options have priced in, making them potential premium-selling candidates.

 

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