Is it time to buy back oil stocks?

About a month ago, on October 15th, I wrote in these pages that I was taking profits and selling oil stocks. Crude futures today are about ten percent lower than I wrote, so you might think that was a good move. The energy sector ETF, XLE, however, is only around 2% lower, so it wasn’t as smart as it looks on the surface. Still, over the next few trading days I will turn the tide and buy back some in anticipation of a rebound in crude.

It might seem like a strange thing to say given the rumors circulating that the Biden administration is releasing oil reserves to fight high prices and even asking for a coordinated release by other countries, but it seems pretty much taken. account at current levels, and the impact, if it occurs, will be short-term in nature.

Biden and other Western leaders are feeling tremendous political pressure to “do something” against rising energy prices and freeing up reserves is the obvious thing for them to do. This will reduce the political backlash somewhat, but we must remember that for many in Biden’s party, the relatively low oil supply and the resulting high oil and gas prices are features of his energy policy, not bugs. If there is to be an accelerated transition from fossil fuels, it will be facilitated by high oil prices, so keeping them deliberately low for an extended period is not an option for him politically.

Then there is the news …

About a month ago, October 15e, I wrote in these pages that I was taking profits and selling oil stocks. Crude futures today are about ten percent lower than I wrote, so you might think that was a good move. The energy sector ETF, XLE, however, is only around 2% lower, so it wasn’t as smart as it looks on the surface. Still, over the next few trading days I will turn the tide and buy back some in anticipation of a rebound in crude.

It might seem like a strange thing to say given the rumors circulating that the Biden administration is releasing oil reserves to fight high prices and even asking for a coordinated release by other countries, but it seems pretty much taken. account at current levels, and the impact, if it occurs, will be short-term in nature.

Biden and other Western leaders are feeling tremendous political pressure to “do something” against rising energy prices and freeing up reserves is the obvious thing for them to do. This will reduce the political backlash somewhat, but we must remember that for many in Biden’s party, the relatively low oil supply and the resulting high oil and gas prices are features of his energy policy, not bugs. If there is to be an accelerated transition from fossil fuels, it will be facilitated by high oil prices, so keeping them deliberately low for an extended period is not an option for him politically.

Then there is the news this morning that the Austrian government is implementing a nationwide lockdown to combat an increase in Covid-19 cases there and is making vaccination compulsory for the whole country from February of l ‘next year. This is causing traders to refocus on Covid and its impact on oil demand, just as the possibility of a temporary increase in supply seems likely. Inevitably, this combination brought crude down again this morning, but basically nothing has changed.

Austria is a country of approximately 9 million inhabitants. In terms of global oil demand, the reduction in consumption following a lockdown will barely be recorded. The problem would be that other European countries currently experiencing an increase in hospitalizations and deaths, such as Germany and the Netherlands, believe they can follow suit. The chances of that happening are greater now than they would have been a few months ago, as elections in both countries are over, meaning politicians can accept short-term criticism for terms. and closures if these things result in long-term benefits. However, while this is enough risk to dampen my enthusiasm for long-term crude futures trading and cause me to take a slightly more defensive stance in my overall equity portfolio for a day or two, it doesn’t. not deter me from returning to energy. actions.

Neither Germany nor the Netherlands will rush to impose restrictions, and there is a good chance that localized regulations and steady increases in the number of people vaccinated in these countries will cause the outbreak to slow before they hit. do it. There will be discussions, of course, but a lot of risk is factored into the CL after the big drop this morning.

Equity purchases are longer-term positions, and when the initial shock of an Austrian shutdown wears off and early reserve releases are gone, the world will return to a situation where demand for energy and therefore of oil is in conflict with a supply constrained by both OPEC + policies and regulations and restrictions placed on industry in the United States and other free market countries. This makes the risk of buying oil stocks worth taking again.

From a technical standpoint, there are also incentives for the oil bears but, again, that sounds like a lot of ado about nothing. They would indicate that the 50-day break in AD (blue line above) is significant, but recent history suggests that is not the case. CL has crossed that line nine times over the past year and has rebounded each time, so it just doesn’t look like a solid support that breaking is of major importance in this case.

A month ago, some weakness in crude seemed likely as political pressure mounted on Joe Biden to do something, or at least make it look like he was doing something, to fight high prices. of gasoline in the United States. and may even take concrete action, but its long-term attitude towards oil is unchanged. So when the critics have calmed down, there will most likely be a return to the conditions that are pushing oil prices up. Despite the long-term negative effects this implies for oil companies, stocks will react positively to the rise in oil for some time, so buying over the next two weeks seems like a decent game.


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Steve R. Hansen