3 Ways to Play the WTI Crude Oil Price Drop

wti crude oil priceThe WTI crude oil price continued its three-month-long decline today (Monday) on poor economic data from Japan and new price forecasts from Morgan Stanley (NYSE: MS).

At 10:45 a.m., the WTI crude oil price was down 0.97% and trading at $42.09 a barrel. The U.S. benchmark has plummeted 33.1% from its May 6 high of $62.93. It's down nearly 11% so far this month.

The Brent crude oil price rose 0.06% to $49.22 a barrel today, but is still down 6.9% in August.

This morning's WTI crude oil price drop came after government data showed Japan's economy contracted in the second quarter. The country's Cabinet Office said today that gross domestic product fell at an annualized rate of 1.6% from April to June. The report cited slumping overseas demand for Japanese goods and lower household spending as the reasons for the price dip.

Since Japan is the third-largest oil consumer in the world, its weakening economy lowers demand for oil imports and causes oil prices to fall.

"There is no engine of growth for Japan right now, either in or outside the country," noted Yuichi Kodama, chief economist for Meiji Yasuda Life Insurance Co., to The Wall Street Journal. "Any economic rebound would be a subdued one."

The decline also comes on the release of Morgan Stanley's weekly energy report. Analysts said this morning that crude oil demand is already near peak seasonal levels and will start to fall as summer comes to a close. Adding to oil's troubles are OPEC's increased production and the U.S. dollar's projected surge throughout the rest of the year.

Despite low oil prices, there are still plenty of ways to make money in the energy sector.

All you need to do is follow these three tips to pick the best oil stocks...

The Three Best Ways to Play Today's the WTI Crude Oil Price

There are three methods for finding the best oil stocks to buy in today's low-price environment...

  • Use the "Yardstick": The yardstick is a tool that helps examine the relationship between a company's booked oil reserves and its trading price. That's important for investors because there is often a direct correlation between how much product is available and profit. The yardstick will help you easily identify undervalued stocks and those with the best near-term appreciation potential. Learn more about this easy-to-use tool here...
  • Identify "Traditional" Producers: The cost of production is the most important financial metric for oil companies during lower price periods. Firms that pursue expensive onshore projects involving unconventional, horizontally drilled wells can lose tons of money when prices aren't near $100 a barrel. That's because higher production volumes don't offset higher operating costs when prices are near $40 a barrel. During lower price periods, you'll want to invest in companies drilling this type of "traditional" well to remain profitable no matter how far prices fall...
  • Target M&A Activity: The past year's oil price crash has seen many companies go belly up. One such firm is Hercules Offshore Inc. (Nasdaq: HERO), the Houston-based drilling company that filed for Chapter 11 bankruptcy just last week. The low-price environment has primed the oil sector for a wave of M&A activity, resulting in a new group of heavyweight companies that will lead the market into a "new energy age." Here's how you can identify those companies likely to benefit from restructuring...

Alex McGuire is an associate editor for Money Morning who writes about oil and natural gas. Follow him on Twitter at @AlexMcGuire92 for the biggest energy updates.

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