The Ideal Candidate To Play A Bounce In Oil

We all know in our heart of hearts that the real key to successful investing and trading is to be somewhat contrarian. Warren Buffet’s wisdom about the fearful and the greedy has been quoted so often that it has moved into the realm of a cliché, but it is still true. It is only common sense that buying low and selling high should be your aim, not the other way around, and in order to do so you have to buy when others are selling, for whatever reason.

Regular readers of my ramblings (assuming of course that such a beast exists) will be aware that I have been bearish on oil for a couple of months. At the beginning of June I wrote here, and in several other places, that I thought that oil’s sojourn above $50 would be short lived, and on June 3rd said that “a return to around $40 looks more likely than a clean break of $50”. Though I say so myself, that wasn’t a bad call.

Now that we are at the predicted level, though, what next? Well, now is the time to start looking around for things to benefit from a bounce back. To some people that may seem crazy…I mean oil futures have lost ground on nine out of the last ten trading days and for perfectly good reasons. Brexit is a fact, OPEC is still pumping like crazy, the rig count in the U.S. is even edging up, and the dollar is in an upward trend. Only a fool would buy now! If that was your reaction, then I refer you to the first paragraph…there is plenty of fear about; it’s time to get greedy.

To extend that thinking to its logical place, the best place to look for value would be in stocks that have lost a lot of ground recently, for whatever reason. Something like Synergy Resources (SYRG), for example, that lost around 9 percent over Wednesday and Thursday of this week. The big drop was in part down to the continued woes of WTI, but was mainly down to the company reporting production levels that were lower than expected.

That production miss was due to a combination of factors, but none of them indicate any long term problems. In fact, if $40 or so does prove to be the bottom of this move down for oil, then that lower production at lower prices may prove to be a good thing. Synergy are sitting on some good resources, both gas and oil, and are ideally placed to benefit if both commodities tick upwards in price, as looks likely over the next month or two.

From a technical perspective, SYRG seems to have found a bottom to the recent drop at around $5.95. That allows for a logical stop loss to cover a break lower than that, at say $5.80, that would limit potential losses to less than 10 percent. On the other hand, the initial upside should oil reverse course as Synergy increases production levels would be a return to the levels of a month ago around $7.50, a 20 percent or so rise.

The technical analysis and risk/reward ratio, therefore, suggest that this is a viable trade. What makes it really appealing, though, is its contrarian nature. E&P companies in general are out of favor right now, and SYRG especially so. Given the temporary nature of what ails them, though, and given that WTI is at a possible inflection point, the stock looks to me like an ideal candidate to play an expected bounce in oil.