Volatile times in the commodities sector

The period 28 Sept. – 12 Nov. saw some incredible share price moves in the commodities and basic materials sectors with drivers including US interest rates, Chinese demand and the continuing battle over oil market share between OPEC and non-OPEC producers. While this period has been particularly volatile given what looks like an impending US rate hike scheduled for December, the theme has remained fairly constant throughout 2015. Importantly, it looks as if it will continue for the foreseeable future. How can investors play this situation to their benefit?

While many are lamenting falling commodity prices in terms of a general long term trend, it’s often useful to consider the short term too. When one does this, a multitude of trading opportunities becomes apparent – even to the traditional long only investor.    

Tullow Oil (TLW)

The two charts above - Tullow Oil (TLW) and Premier Oil (PMO) - present examples of the widespread volatility that has beset many share prices this autumn.

Stagnation? What stagnation?

It’s evident that stagnant oil prices are not necessarily translating to stagnant share prices, but what’s the best way to capitalise on this kind of price action? How do we aim to bank profits in such an environment?

With much bearish sentiment weighing on markets throughout 2015 giving us cause to believe we’re living in different times now, those who’ve invested in the traditional way – buying shares in pursuit of growth and income for example – will have had a tough year.

If there was ever a good time to be looking at ways to not just survive the current climate, but to actively profit from it, it’s now! As a professional in the Oil & Gas sector you’re already at an advantage in terms of market moving news and events. All that’s missing is a way for you to trade Oil & Gas stocks that’s simple, fast and flexible.

Of course, there are many who will offer you a trading platform and £10,000 of ‘bonus’ cash for signing up that somehow never materialises; will court you every step of the way to opening and funding an account before leaving you to face the markets alone, trading market-made instruments with unfriendly spreads. So this report is as much about how to trade oil & gas stocks as it is about the importance of having the right service provider.

How do investors take advantage of Oil & Gas volatility in 2015?

Many investors are now using derivative products to trade the markets because they allow swift execution and are typically leveraged, meaning only a deposit must be paid to secure exposure to a company’s shares. Perhaps the best known derivatives are futures and options. These involve betting on market conditions at a fixed point in the future. In times like this, that might be a tough call.

More recently, CFDs have exploded in popularity because of their close synergy with traditional shares. Like options, you simply make a deposit to secure the position while like shares, CFDs can be held for a few seconds or indefinitely. CFDs are currently exempt from the stamp duty which is applicable to traditional shares. That, combined with significantly lower dealing costs makes CFDs the ideal instrument with which to speculate on shorter term market moves.

Unlike those of most other providers, Accendo Markets’ CFDs are linked directly to multiple exchanges; the spreads on our platform are those of the market itself and NOT invented by us. It doesn’t get more transparent than that! What’s more, we won’t ever leave you facing market volatility alone (unless you want us to!). And like all other reputable providers, Accendo is fully FCA regulated – all you can and should expect from an award-winning City of London brokerage.

 Shares vs. CFDs

Buying 20,000 shares in Tullow Oil (TLW) @ 218.9p requires an outlay of £43,972 plus commission (see purple boxes above left), while the same exposure via a CFD requires just £2,189 plus comm (see green boxes above right). If a trader invests in Tullow Oil, one would assume she believes the share price is likely to move in her favour. After considering the ‘worst case scenario,’ the trader may conclude there’s little point in exposing the full £44,000 to TLW shares - some of that capital could be put to good use elsewhere in the markets.

If you had, say, £45,000 to invest in Oil & Gas shares, you could deposit that amount into a share dealing account and purchase shares in a company. You might pay 3% commission to open the position, 0.5% in stamp duty, the whole £45,000 will be tied up in company X shares and any profit or loss is based on that exposure.

Alternatively, you could deposit £45,000 into a CFD account and secure the same amount of exposure for just a small deposit – as little as 5%. With Accendo Markets, you’ll also find highly competitive dealing costs, the option to deal over the phone for FREE and our range of no-nonsense research & trade ideas delivered direct to your inbox, not to mention being  accessible 24 hours a day, 7 days a week on our research app.

Shares in Tullow Oil have traded as high as 460p and as low as 154p in the past 12-months. 20,000 Tullow Oil shares can be bought for around £44,000. If the share price were to make it back only far as October highs of 270p, that implies 27% potential upside should a trader go long the stock using conventional shares while a re-visit of 52 week highs would return a massive 117%.

If the price were to fall back to 52 week lows of 154p, however, a long position would be out of the money to the tune of 27%. Traditional shares only permit long positions, but with CFDs you can speculate just as easily on falling prices. So if you thought that Tullow Oil might be about to face some unpleasant business conditions, you could go short. In that case, if the share price fell back to its 52 week lows you could still stand to profit handsomely.

The percentage gains and/or losses indicated above and on the chart are based on full exposure to Tullow Oil shares. To trade Tullow Oil using a CFD requires a deposit of 5%; 20,000 Tullow Oil shares can currently be secured with Accendo Markets for just £2,189 - the same exposure as traditional shares, the same potential profit or loss but for a fraction of the outlay.

Wherever one invests, one does so in the belief that the market will move in one’s favour. That said, it is of course extremely useful to consider the potential worst case scenario and allocate extra funds as you deem necessary to cover that possibility, but you can see that by working with Accendo Markets your profit potential and trading flexibility are greatly increased while dealing costs are much lower.

With all this in mind, we’ve compiled some of our most popular Oil & Gas stocks below, summarising their year-to-date trading ranges, potential price targets and the deposit requirement to secure shares. Some are small cap E&P stocks that aren’t the most liquid, but are prone to large price swings while others are more heavily traded blue chip oil majors whose prices often change by a few percent intraday.

Please note that the following trade ideas are designed to give you an indication of the potential behaviour of Oil & Gas stocks given the market conditions present at the time. The pricing data is correct as at the time of writing.

Where next for PMO shares?

• What does increased production potential mean for E&P companies with crude prices and global supply at current levels?
• Could smaller players like PMO benefit from potential M&A activity just as BG Group did in spring 2015?

The trader’s research and knowledge will help to ascertain whether he or she thinks shares in Premier Oil (PMO) will rally towards the highs of 190p or fall towards lows of 60p.

Deposit requirement: 15%

A £45,000 long position (68,260 shares) can be secured for £7,500* with a CFD, and might seek a re-test of 4 week highs 97p and a 40% profit in the short or medium term, while a return to 52 week highs 190p would imply a 175% profit.

A more bearish outlook could give a trader cause to take a short position (looking for the price to fall), where a pullback to 12 year lows 60p could return 13%.

Broker Consensus: 42% Buy, 33% Hold, 25% Sell

Average 12-month broker target price: 120p

Where next for GKP shares?

• Heavily discounted GKP and fellow Iraqi Kurdistan-based peers are hardly a hot prospect for prowling oil majors given the instability in the region – not much chance of an M&A boost here.
• However, GKP’s share price has suffered from a prolonged revenue sharing dispute, which now looks to be sorting itself out, so a move back towards pre-dispute levels could emerge as debts are repaid and production increases.

Will shares in Gulf Keystone Petroleum (GKP) rally towards the highs of 82p or fall towards lows of 20p?

Deposit requirement: 15%

A £45,000 long position (196,080 shares) can be secured for £7,500* with a CFD and the trader might only look for a re-test of 3 month resistance 35p, implying a 35% profit.

Going short at the current price, a potential target would be 5-year lows 20p on a generally bearish outlook for crude prices and M&A hopes being pinned elsewhere in the sector. In this case, a 23% return might be realised.

Broker Consensus: 40% Buy, 20% Hold, 40% Sell

Average 12-month broker target price: 54p

Where next for BP shares?

• Oil majors have attractive dividend yields at current share prices as well as good recovery potential helped by downstream and trading activity.
• However, an oil major’s share price is apt to fall if it decides to acquire a smaller competitor, hence many investors will consider oil majors to be a long term or income play.

Will shares in BP (BP.) rally towards the highs of 485p or fall towards lows of 320p?

Deposit requirement: 5%

£45,000 of exposure (13,586 BP shares) can be secured for just £2,500.

A bullish trader might consider recent price action to be consolidation ahead of a second phase of the Oct / Nov rebound. Confirmation could be sought by holding off until the price breaks out decisively above 4 week resistance 397p before going long and targeting 52 week highs 485p and a 22% profit.

If the price fell below the 370p level, a bearish trader might short the stock expecting the price to fall further towards 6.5 year lows 320p. Were that to be the case, a 13% profit might be realised.

Broker Consensus: 29% Buy, 64% Hold, 7% Sell

Average 12-month broker target price: 405p

Where next for RDSB shares?

• As with BP, RDSB has a potentially attractive dividend yield at current price levels.
• Liquefied natural gas (LNG) the only fossil fuel to be increasing its share of the global energy market, so any Oil & Gas company with good capability in this area will be viewed favourably by the brokers.

Will shares in Royal Dutch Shell (RDSB) rally towards the highs of 2410p or fall towards lows of 1500p?

Deposit requirement: 5%

£45,000 of exposure to (3,120) RDSB shares can be secured for £2,500*.

A bullish trade here could go on the prospect of the share price bouncing off the 1600p level and heading towards 1800p. Beyond that, 4 week highs 1857p and a quick 16% profit might be seen to be attainable. The trader may instead seek confirmation of the new uptrend by waiting for the price to clear 1800p before going long, targeting the highs of 2410p and a 33% return.

If the price were to fall below 1685p, a bearish trader might short the stock expecting the price to fall further towards 5 year lows of 1500p and an 11% return.

Broker Consensus: 58% Buy, 32% Hold, 10% Sell

Average 12-month broker target price: 1992p
NB: All pricing and consensus data from Bloomberg on 12 Nov; Consensus breakdown available on request ; *before commission

Want to know more?

Why not have a look at the most recent price data for the above companies – where did the price go post 12 November? If you’ve seen something interesting and would like to discuss it, give us a call and speak to one of our traders. We’re always delighted to engage in interesting, thought provoking conversations about the markets!

The Accendo approach – what’s different?

At Accendo Markets we don’t tell you what to do. It’s your call whether you buy or sell. Our aim is to provide the help you need, highlighting opportunities which may be profitable to you, the trader, and assist you in making trading decisions from which you can benefit via use of leveraged instruments.

Our approach focuses on 3 elements below;

• Education - not obligation
• Observations - not recommendations
• Assistance - not persistence

Our unique and award-winning service provides you with the help and tools you need to make appropriate trading decisions in the financial markets, both to grow and protect your capital.

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For any questions on how to trade UK Oil & Gas equities via CFDs or shares,

including ways in which your risk can be managed,

call us to discuss on 0203 051 7461

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