Is It Time To Buy Big Oil?

We are now into the meat of earnings season when it comes to big oil, with the major oil companies in all reporting over the next few days. The first of them, Shell (SHEL), did so on Thursday morning, and if what they revealed is repeated on Friday when Exxon Mobil (XOM) and Chevron (CVX) release their Q2 earnings, I will be repeating what I did there, buying on any resulting dip in their stocks. By the time you read this, of course, you will know whether that transpired or not, and if it did, how that trade fared, at least immediately, but it is still worth explaining what to look for in the earnings reports and why that “buy the dip” trade makes sense, because it is a longer-term trade worth considering even if it doesn’t produce immediate results.

The key to understanding why these stocks might be buys should they disappoint on earnings is understanding the difference between what moves the market in the short and long terms. Short-term moves are about traders trying to anticipate how other traders will react to news. Thus, if an earnings report disappoints, as Shell’s did, those traders compete to be the first to sell, pushing the stock quite a bit lower. At some point, though, the longer-term dynamic based on the conditions and outlook both for the specific company and the broader economy take over.

For oil companies, those fundamental factors are looking better now than they have for some time. Economic data from the US is increasingly suggesting that the miracle of a “soft landing” is on the cards, a view supported by Thursday’s GDP data. US GDP grew by a much better-than-expected 2.4% in Q2, a year or so after the Fed began hiking rates consistently. There is a feeling among some that the impact of those rate hikes will be felt before too long and that when they are, it will be messy. But so far, there is no sign of that, even as the inflation rate has slowed.

Then there are some potentially significant earnings reports and outlooks that we have seen this week. Facebook parent Meta (META) beat expectations handily, mainly on the back of improved earnings from their core digital advertising business. That and the fact that Facebook is an international business indicate a growing confidence among businesses that things will turn out okay. On the consumer side, both Mastercard (MA) and Visa (V) reported higher-than-expected growth in transactions and talked about the resilience of the consumer.

Add that all up, and even a cynic like me starts to believe that maybe the Fed and other central banks can, by accident or design, save the world.

From a more industry-specific viewpoint, there are also other reasons to believe that any negative reaction to disappointing earnings from oil companies will be quite short-lived. Earnings are historic by definition and Q2 was always going to be a hard one for oil companies, just based on oil prices during the quarter.

Crude began the quarter trading above $80, then fell to the mid-60s, then recovering slightly to hover around $70 for most of the three-month period. That would have put pressure on oil companies but, as you can see from the chart, the beginning of Q3 is quite different. As I write on Thursday, WTO futures have just regained the psychologically important $80 level, and with no end in sight to the good news economically, a big retracement over the next couple of months looks unlikely.

There is, therefore, a good chance that the short-term, backward-looking news from the remaining multinational oil companies will disappoint the market, but that the immediate future, over say the next month or so, will be positive. That sets up a classic buy-the-dip opportunity, and it is one that I will be attempting to benefit from over the next few trading days.