Can You Profit from Gadhafi’s Fall?

08/22/2011 11:13 am EST

Focus: COMMODITIES

Thomas Aspray

, Professional Trader & Analyst

Further weakness in three high-yielding oil stocks will present excellent buying opportunities and allow investors to earn steady income with less risk than US Treasuries.

The likely fall of Moammar Gadhafi’s regime in Libya is expected to push oil prices even lower, and in early Monday trading, Brent crude oil futures were down over 1%. If Libya is able to return to 50% of its former oil production, it would have a significant impact on global crude oil supplies.

The technical action of crude oil suggests that after a 38% slide from recent highs, it is closer to a low and another major drop is unlikely. Even if you take the view that the major global economies are entering a new recessionary period, this would dampen but not stop the growth in the emerging market economies. Given what I see as a finite supply of crude oil, prices are likely to be higher, not lower, over the coming years.

Many of the high-yielding global oil stocks have been hit hard along with the rest of the market, as investors have sold almost everything. On further weakness, these yields will become even more attractive, and having orders in place will allow you to lock in yields that have less capital risk than US Treasuries, in my opinion.

chart
Click to Enlarge

Chart Analysis: The weekly chart of the continuous crude oil contract shows that the low from two weeks ago again came close to the major 50% Fibonacci retracement support at $73.65. The May high was at $114.83.

  • There is a band of chart support in the $67.50-$70.50 area with the 61.8% support level at $64
  • Volume has been heavy over the past month, which has pushed the on-balance volume (OBV) below its weighted moving average (WMA). It is still well above longer-term support at line b
  • Initial resistance is now at $89-$91 with stronger resistance in the $95 area

Statoil ASA (STO) is a $73 billion Norwegian oil and gas drilling company. Norway did an excellent job of surviving the financial crisis and has benefited as concerns over banking in the Eurozone have increased.

  • STO pays a dividend of 94 cents for a current yield of 4.1%. The recent low for STO was at $20.12, as the weekly Starc- band was exceeded
  • The monthly Starc- band is at $19.90 with the major 61.8% retracement support at $19.41
  • The weekly OBV has dropped sharply through its weighted moving average and is getting oversold. Meanwhile, the monthly OBV (not shown) did confirm the recent highs and lows
  • There is initial resistance at $24.50-$25.37

NEXT: Two More High-Yielding Oil Stocks

|pagebreak|

chart
Click to Enlarge

Royal Dutch Shell plc (RDS.B) is a $193 billion global oil and gas company. The B shares are recommended for US investors because holders of the A shares are required to hold back a tax on the dividends. (For more information, see the company’s Web site.) RDS.B peaked at $78.81 in May and had a recent low of $60.04. It pays a dividend of $3.36 and currently yields 5.4%.

  • The major 50% support stands at $58.25 with the long-term uptrend, line a, in the $56 area
  • The weekly OBV confirmed the recent highs and is holding up quite well, as it is just below its weighted moving average. This indicates that the selling on the decline has not been heavy so far
  • The weekly OBV staged a major breakout above resistance (line b) in late 2010
  • There is initial resistance at $67-$70

Seadrill Ltd (SDRL) is a $13 billion oil and gas exploration and drilling company. SDRL peaked in March at $38.49 and pays a dividend of $3 for a current yield of 10.4%.

  • SDRL had a low two weeks ago at $26.26 with the 38.2% support at $25.94
  • The 50% Fibonacci retracement support is at $22 with the 61.8% at $18.05
  • The volume has been heavy on the recent decline, as the weekly OBV violated support three weeks ago
  • The daily OBV is still negative and shows no signs yet of bottoming
  • There is initial resistance at $30.50-$31.50 with much stronger resistance above $33

What It Means: As there are no signs yet that stock market has bottomed, these three oil stocks are likely to test—if not drop below—their early-August lows before a bottom is complete.

Given their current dividends, such a drop would provide an even more attractive yield, especially when compared to the negative real rate of return in the Treasury market.

How to Profit: For Statoil ASA (STO), go 50% long at $20.44 and 50% long at $19.88 with a stop at $18.14 (risk of approx. 10%). At an average price of $20.16, the yield would be 4.66%.

For Royal Dutch Shell plc (RDS.B), go 50% long at $60.34 and 50% long at $59.18 with a stop at $56.64 (risk of approx. 5.2%). At an average price of $59.76, the yield would be 5.62%.

For Seadrill Ltd. (SDRL), go 50% long at $26.48 and 50% long at $25.48 with a stop at $23.88 (risk of approx. 8%). At an average price of $25.98, the yield would be 11.54%.

Related Articles on COMMODITIES