Oil Changed Everything – Again
Michael A. Gayed | Apr 23, 2020 11:14AM ET
- The oil market has been whipsawing around lately, culminating in negative oil prices.
-
Despite this, the energy sector represented by XLE is the best performing sector since the low.
-
When you take out the noise, there's a major bull case emerging for oil equities.
The older I get, the more I see a straight path where I want to go. If you're going to hunt elephants, don't get off the trail for a rabbit. – T. Boone Pickens, oil magnate
I always thought the lower bound was -100% without leverage. Apparently, incorrect when it comes to oil futures. For the first time in history, U.S. oil prices crashed into negative territory as the loss of any demand was crushed in the coronavirus pandemic. West Texas Intermediate, the U.S. benchmark, traded as low as $-40.32 a barrel in what can only be described as bizarre and chaotic trading. There's only so much storage before space runs out. And that's precisely what happened. Jeffries analyst Jason Gammel called it “the bleakest oil macro outlook ” he had ever seen. Of course, with this bleak picture, you would expect that oil equities are crashing. But that would be in normal circumstances. The best performing sector in the S&P 500 since the March 23 low is, in fact, the energy sector.
From March 23 to April 22, XLE (NYSE:XLE) has gained an impressive 42% despite oil prices cratering. How can this be? Well, despite the rally, XLE is still well off its high in the last 52 weeks, lower by some 50% in the previous year. Some may think this is simply a “dead cat bounce” in energy equities. I think otherwise. Oil equities are some of the most oversold, under-appreciated companies out there right now. And while there's short-term pain in hand for oil companies, the infrastructure globally for oil isn’t about to change tomorrow. China’s economy already is slowly reopening for business. China is the world’s biggest energy importer and already is stocking up on the cheap black stuff. Evidence suggests that for months, China has been amassing inventory. Smart for a country that's expected to rebound strongly once the coronavirus is contained, for now, and cured later. So while there's no demand right now for oil, it will not be that way forever. And it may take some time. With rock bottom prices, how could you not be in the equities that are levered for a potentially massive bounce? The conditions are there.
Get The News You Want
Once you start to factor in how much fiscal and monetary stimulus is happening around the globe right now, you begin to think about what the following effect will be. As I mentioned in The Lead-Lag Report, one effect I can think of is inflation. Most economists see a very sharp recession, even a depression, but an equal rebound in magnitude never seen before as economies reopen around the globe. There's still a correlation between demand and oil prices, and if demand rebounds, oil prices should as well. Oil companies are a great way to leverage into that at a ridiculously cheap valuation right now.
If you look at how far XLE has fallen, it's easy to see how even a partial retracement could add extreme alpha to your portfolio. The 200-day moving average is at a whopping $54 right now, compared with the last price of around $33-34 on April 22. A retracement to the 50-day moving average still yields an additional 14% right now. One thing that commodity investments tend to do, however, is to maintain momentum. After a 50% drop over the last year, most of the bad news is likely priced into the ETF. And after a 42% surge from the lows, the momentum to the upside could just be getting started.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.