How things have changed in just two short years. When COVID-19 struck the world economy in the spring of 2020, lockdowns and social distancing severely limited economic activity.
This created a huge supply glut, which in turn caused crude oil futures to fall into negative territory for the first time ever. There is an old saying about there being an opportunity in every crisis.
With crude oil futures delivery in May trading at -$38 a barrel, what bigger crisis could there be for the energy sector? In the meantime, we knew the pandemic won’t last forever and the world was still hopelessly dependent on fossil fuels. So, we thought we couldn’t hope for a better time to buy some cheap oil stocks.
The problem was the drop in crude oil prices really did create a severe crisis in the industry. Not all oil companies were going to survive and we had no illusions that we could pinpoint the survivors.
So, we opted for a more diversified approach by purchasing shares in the SPDR® S&P Oil & Gas Exploration & Production ETF (NYSE:XOP).
We chose it because unlike other energy ETFs which are heavily exposed to majors Chevron (NYSE:CVX) and Exxon Mobil (NYSE:XOM), XOP is much more balanced. So, on Apr. 27, 2020, XOP became a part of The EWM Interactive Stock Portfolio at a price of $45.86.
Two years later now, XOP trades above $150 a share, up 417% from its March 2020 bottom. An impressive gain, considering the depth of the crisis the industry was in at the time.
Then, in February, 2022, Russia invaded Ukraine and sent crude oil prices to levels last seen in 2008. In just two years, the world swung from too much supply to not nearly enough of it. Two years ago, many considered the oil industry ‘uninvestable.’ Today, you can hardly find an analyst who is bearish.
The Easy Money In Crude Oil Stocks Has Likely Been Made Already
Having said that, we recently sold our position at an almost 200% gain. We think extrapolating the recent past into the distant future is a dangerous game to play.
Trees don’t grow to the sky, especially in a cyclical industry such as oil and gas. Besides, the Elliott Wave chart below suggests the easy money has already been made in XOP. Take a look.
Assuming a five-wave impulse is going to form from the bottom at $29.48, it appears XOP has entered a sequence of fourth and fifth waves. Waves 4 and 5 of (3) as well as waves (4) and (5) need to develop before the uptrend is over. However, this means the price action is likely to get choppy and overlapping going forward.
Targets around $200 a share are still reasonable, but the pullbacks along the way make things very complicated. Besides, fifth waves are never guaranteed.
The market can always simply decide to limit the recovery in crude oil stocks to just a three-wave sequence. Even if it doesn’t and a complete impulse eventually forms, a notable (a)-(b)-(c) correction should then occur. In our opinion, crude oil stocks are simply not worth the risk anymore.
Assuming a bearish reversal near $200, we wouldn’t be surprised to see a ~50% decline back to the support near $100. We only hope that it will be triggered by the end of the war in Ukraine.