Why now could be a good time to take a punt on oil stocks

published 21 May 2010

BP's share price has been slaughtered in the wake of the Gulf of Mexico oil spill, notes Ian O'Sullivan at spread bettingbroker spreadco.com. It has tumbled by more than 20% to just above 500p, wiping £25bn off its market capitalisation. That's more than the likely cost of the clean-up operation.

BP shares trade at roughly seven times forward earnings for the current financial year, compared with, say, Royal Dutch Shell on a multiple of 8.7. Then there is the forward yield of 7.5%, higher than Shell and second only to AstraZeneca among members of the FTSE 100.

Of course, the tumbling oil price hasn't helped, with crude falling some 22% from its recent highs of less than a month ago. However, says O'Sullivan, in a similar slide to the 500p level in March 2008, BP rebounded back to 650p within two months, a 30% gain. There have been similar bounces at the 500p level on several occasions -in 2000, 2001, 2005 and 2007; it's something of a "line in the sand" for buyers. So if you're feeling brave, O'Sullivan suggests you might want to buy BP shares on a spread bet, setting a stop loss of around 475p in case the general market backdrop keeps deteriorating.

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Similarly, in the US, Exxon Mobil shares have fallen 26% this year to lows not seen since the depths of the 2008 financial crisis at $60.30. $60 has been an important support/resistance level going back to 2005, so again, now could be a good time to either buy into Exxon Mobil shares for the longer term, or you could spread bet on the stock to play any short-term bounce.

Tim graduated with a history degree from Cambridge University in 1989 and, after a year of travelling, joined the financial services firm Ernst and Young in 1990, qualifying as a chartered accountant in 1994.

He then moved into financial markets training, designing and running a variety of courses at graduate level and beyond for a range of organisations including the Securities and Investment Institute and UBS. He joined MoneyWeek in 2007.