Oil prices plunged to their lowest level of the year on Tuesday, erasing big gains made on Monday as investors anticipated that China’s surprise devaluation of the yuan signals reduced demand for commodities priced in dollars.
But if you’re looking beyond this week’s wild swings to get a sense of where oil prices are going, it’s worth paying attention to what oil sectors insiders were doing last week: buying, and big-time. The buying was so heavy, it's a signal energy stocks will do well in the medium term.
It won't be straight up from here, of course, but today’s drop to fresh lows means it’s a good time to consider adding to energy holdings.
Here are the three qualities to the recent insider buying which tell me it was a decisively bullish statement by energy insiders in the heated debate about the outlook for oil and the group.
The sheer size was impressive. By my tally, insiders at energy producers and companies that sell them equipment and services purchased $49 million worth of stock in the eight trading days through Aug. 10.
A cynic might respond that this doesn't sound like a lot for executives who have annual salaries in the millions. But insider buying, as with a lot of things in life, is all relative. And this amount of buying in just eight trading days is relatively big, to say the least. After all, this is a sector that can go for months without seeing any significant buying at all.
The buying reaches deep into all corners of the industry. Insiders were buying at about 40 energy companies by my count. And a rich variety of them, to boot. The buying happened at companies with U.S. and global exposure, at exploration and production companies, and at energy services and pipeline businesses.
Some of the biggest buying, for example, happened at Diamond Offshore (DO), a drilling company where insiders picked up $4.8 million worth of stock. But there was also significant buying at resource plays with a U.S. bent like Southwestern (SWN), and those with a more global profile like Exxon Mobil (XOM), which has far flung assets from Angola to Australia, Papua New Guinea and the Russian island of Sakhalin in the North Pacific Ocean.
The buying also happened across the market cap spectrum. Besides Exxon, it popped up at giants like Chevron (CVX) and Occidental Petroleum (OXY). It reached down through mid-size companies like Marathon Oil (MRO) and into the realm of tiny players like Gran Tierra Energy (GTE) and Mexco Energy (MXC), which develop energy assets in Latin America and the U.S. When making sector calls on insider buying, it's good to see this kind of reach across market cap sizes.
All kinds of insiders have been buying. We see the usual array of buying by directors and "beneficial owners," meaning investors who own so much stock they have to report purchases as insiders. More importantly, there's also been big buying in the C-suite, and by execs below them.
We saw buying by CEOs like Lee M. Tillman at Marathon Oil and Roger Jenkins at Murphy Oil (MUR), down through chief operating officers and line officers like A. James Teague III and Gerald Cardillo at Enterprise Products Partners (EPD), a pipeline company. In insider buying analysis, purchases by managers and line officers can be more significant than buying by directors, because managers have the front row seats to the business operations.
WHY ARE INSIDERS SO BULLISH?
With West Texas Intermediate crude back down to around $44 a barrel, well below its recent peak around $60, why are insiders buying when everyone else is so negative?
The short answer is that at its current price, WTI is just slightly above its six-year low of $43.46, reached on March 17. That may be an unsustainable price because it destroys too much supply and creates too much extra demand, maintains Mike Breard, an energy sector analyst at Hodges Capital Management. "Producers will stop drilling. People will buy more. The idea that oil is going to stay in the $40 range for three to four years is utter nonsense," says Breard.
Continental Resources (CLR) Chairman and CEO Harold Hamm offered the same view in his company's Aug. 6 earnings call. "We're not seeing enough supply growth worldwide to offset the natural declines in production," said Hamm. "We're seeing meaningful world demand growth led by lower oil prices, which will speed rebalancing."
Hamm also made a bold prediction during the call when he suggested the U.S. may soon lift its ban on crude oil exports. This would benefit U.S. producers, including his company, by narrowing the WTI discount to Brent oil. Brent has traded at a premium of 10 percent to 20 percent over WTI for the past several years. "U.S. oil exports simply make too much sense economically, especially as this administration moves to lift restrictions on Iranian oil exports," said Hamm.
WEAKER DOLLAR TO BOOST OIL?
Economists expect the Fed to hike rates when it meets on Sept. 16. But what if the Fed delays rate hikes again in the wake of China’s currency move and concerns about the damage the strong dollar does to the U.S. economy by hurting exports, or due to worries about sluggish employment and wage growth?
If the Fed delays — or if it surprises and raises rates by less than 0.25 percentage points — the dollar would fall, even if temporarily. Since oil and the dollar are inversely correlated, that would put a bid under oil. This is the working thesis of Stifel energy sector analyst Michael Scialla who predicts WTI will trade up to $55 later this year and $65 next year. "We suspect a highly anticipated interest rate hike will be delayed beyond the third quarter," says Scialla, “which could cause the dollar to lose ground and support oil prices in the second half.”
For a closer look at three oil sector companies with interesting insider activity, see here.
At the time of publication, Michael Brush had no positions in any stocks mentioned in this column. Brush has suggested DO, XOM and OXY in his stock newsletter Brush Up on Stocks. Brush is a Manhattan-based financial writer and money manager who has covered business for the New York Times and The Economist group, and he attended Columbia Business School in the Knight-Bagehot program.