A Gusher of Opportunities

A Gusher of Opportunities

Sometimes the charts and the fundamentals don’t jive.  The Standard & Poor’s 500 earnings forward estimates for 2019 have been dropping as stocks have been rising.  The market seems to believe that a decent recovery is to begin by the second half of the year.

Sometimes, both the charts and fundamentals DO line up for a high probability trade.   Such is the case in the Energy Sector where stock prices remain depressed while fundamentals are improving rapidly.

The recent recovery in Oil Prices is also a positive sign for the economy.   Typically, movements in prices in the short run are more affected by changes in DEMAND.  SUPPLY is much slower to adjust to changing prices.

The energy sector is setting up very nicely for a pretty decent rally.  Unlike the S & P 500, rising OIL prices and prospects for earnings have NOT been accompanied by higher STOCK prices.  The large integrated Majors, such as Chevron and Exxon, ARE already at or near new all time highs.  Others, however, notably drillers and shale producers, are just beginning to lift off.

We began the discussion of opportunities in the energy sector in our most recent article. “New Market All Time Highs Dead Ahead and More Trades For the Next Leg”.  (https://markonomics101.com/2019/04/07/new-market-all-time-highs-dead-ahead-and-more-trades-for-the-next-leg/).  

In addition to the Energy companies mentioned as attractive in that piece, we offer several more in that opportunity-abundant Sector.

Domestic Oil Reserves and Production Continue to Explode


Crude Oil production in the United States continues to break records.  The most recent data reveals production is now 12.2 million barrels per day (bpd). (https://oilprice.com/Energy/Crude-Oil/Smart-Money-Is-Piling-Into-Oil.html).

The historical daily oil production chart on the left shows the incredible “hockey stick” that characterizes the trend.  After years of being economically unviable, shale oil technology, most notably “fracking”, is a wild success. (https://www.macrotrends.net/2562/us-crude-oil-production-historical-chart).

“Fracking” is a process used in what’s called “tight oil” or shale.  Instead of being contained in one large pool, shale oil is caught in multiple “tight” spaces within the underground rock formations.  Fracking involves the injection of water, steam, sand and other chemicals designed to combine the many smaller pools of oil that are trapped in porous rock. Critics, on the other hand, believe that fracking is environmentally damaging and may causes earthquakes.

The explosion in production since 2009 has been solely fueled by increases in shale oil production.  Conventional Crude production has been dwindling and is now second to shale.

Proved reserves are also much higher, double of those a decade ago.  North Dakota’s Bakken field now produces more oil than Alaska. At two million bpd, it’s approaching Texas. (https://www.thebalance.com/us-shale-oil-boom-and-bust-3305553).

Shale Production, however, requires frequent drilling in the same field.  Convention crude oil fields last for decades while Shale wells typically last only about 2 years.  Individual shale well production reaches a peak usually within 18 months and falls off quickly.  Production increases for a field require drilling many, many wells to offset the falloff in the earlier individual wells.

Energy Prices and Rigs On the Rise

Last year’s rise in Oil prices to $75 was accompanied by a  SURGE in Shale Oil Production.   Baker Hughes, a subsidiary of General Electric, reports a weekly “rig count” of wells drilled.  (https://www.aogr.com/web-exclusives/us-rig-count/2019).

The current rig count as of April 5th, 2019 is 1003, the highest its been in 3 years.  Even though plunging prices temporarily stalled drilling in the 4th quarter of 2018, it has since resumed climbing as oil prices have recovered.

Oil Shale Producers are thought to have a “sweet spot” between $40 and $60 dollars per barrel. With WTIC closing today near $64, the rising rig count ought to continue.  That means higher production, higher margins and MUCH higher profits for the Shale producers, whose costs exceed conventional production.  It also means increased demand for rigs, a boom to drillers.

More Opportunities Ready To Gush

The Energy Sector is both timely and well positioned for short to intermediate term trades.  A Slide Show illustrating some trade ideas is presented below.  Some key takeaways are as follows:

  1. The Oil Service Index of drillers (OSX) is just breaking out from a “Cup and Handle” pattern.  This indicates that the technical environment for drillers has turned BULLISH.
  2. Oil Refiner Valero (VLO) is also completing a “Cup and Handle.  It, too is now BULLISH.
  3. Shale producers Anadarko (APC), Whiting Petroleum (WLL) and EOG Resources (EOG) are completing ROUNDED BOTTOM patterns.  Once they clear resistance, they will also turn BULLISH.


Geopolitical Considerations and Risk

In an effort to support prices, Saudi Arabia is currently producing 500,000 bpd less than it did last month.   In addition, political instability affects several of the OPEC nations, notably Venezuelan and Libya.

OPEC producers, however, are often known to EXCEED their quotas in order to capitalize on higher prices.  In addition, the profitability of domestic producers rises quickly above $60 per barrel.  Getting increased production to market is still fraught with obstacles and bottlenecks including the pipeline capacity from the newer Shale wells.  In addition, refinery capacity that can handle Shale is still in short supply.  These risks may come into play down the road.

In 2013-2015, rig counts approached 2,000 as shale producers rushed to take advantage of $100 per barrel prices.  Ultimately, the oversupply drove oil prices to less than $30 per barrel in 2016, causing substantial losses in the shale patch.

Since then, shale producers have invested in lowering their breakeven costs to be competitive in a lower oil price world.

Inflation Rears It’s Head

The rebound in Oil Prices is working its way slowly into prices.  This morning, the Producer Price Index was reported UP 0.6% MONTH over MONTH, sending annual numbers above 2%. (https://www.zerohedge.com/news/2019-04-11/producer-price-inflation-prints-much-hotter-expected-energy-costs-soar). 

If inflation does indeed finally start to march upward, this would be a BULLISH sign for Gold and Precious Metals. Gold is still languishing below MAJOR Resistance at $1,380.  “Golden Opportunities”.  (https://markonomics101.com/2019/03/26/golden-opportunities/).

Set Your Trading Limits

As with anything that looks like a high probability of success, the risk of a sudden change without notice is always present.  Keep in mind the importance of setting trading or sell stops.  A refresher course is here: “The Importance Of Setting Trading Limits”.  (https://markonomics101.com/2019/03/28/the-importance-of-setting-trading-limits/.

While the BULL Market probably still has a way to go, being in the right stocks is essential.  In the first leg it was Chipmakers who led the way.  “Chipmakers Poised To Lead Nasdaq Higher”.   (https://markonomics101.com/2019/02/06/chipmakers-poised-to-lead-nasdaq-higher-chart-of-the-day-13/).  In this phase, Energy is set to pull the wagon.

Be Informed, Not Misled!



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