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Crude Oil: Energy Overweight Is Not Working

Published 03/09/2017, 12:41 AM
Updated 07/09/2023, 06:31 AM
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The API data last night, and the EIA data this morning both showed a build in crude inventories which sent crude oil down 4% – 5% today (despite the shortfall in gasoline inventory) and also sent the Energy Select Sector SPDR (NYSE:XLE), iShares US Energy (NYSE:IYE) and VanEck Vectors Oil Services (NYSE:OIH) (Energy ETF’s and long all) down on heavy volume in today’s trade as well.

Client’s Energy overweight is not working.

Crude oil (WTI) is currently testing its lower band of $50 – $55 that it has been trading in for the last several months.

The crux of the overweight argument is that crude oil and the Energy sector will be lapping its two weakest quarters of earnings for the sector probably since early 2009, as crude oil tested $28 last January – February ’16. Crude really doesn’t even have to rally that much to put up solid Q1 ’17 earnings starting in late April, and which could last through the first half of 2017. However I thought the stocks would begin to reflect some of that earnings and revenue improvement by now. (Reviewing the Thomson Reuters I/B/E/S Energy sector earnings data each week, the forward estimates have been steady in percentage terms, but the actual net income is lower. In other words, there is growth expected this year, it is just off very weak 2016 comparisons.)

In addition with the Presidential election and the Congressional change last November ’16, the prospects for faster global growth might otherwise improve global demand at least marginally.

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Finally, not often discussed but the Saudi Aramco IPO now slated for 2018 at the earliest I thought would tend to sway the Saudi’s to keep their thumb off the scale and keep supply somewhat tighter to insure solid demand for the very-interesting IPO.

The elephant in the room though is the US frackers who were decimated by the drop in crude and nat gas in late 2015, early 2016, and still might be motivated to get production online quickly to take advantage of $55 crude. In an industry known for its lack of discipline around production, hoping the US frackers would remain constrained might have been asking too much.

Still, it wont take much to rally the group off these levels. The hope is that $50 holds on WTI.

The Saudi’s were rather chirpy about commenting that the agreed-upon production quota’s were holding, but they have suddenly gone quiet.

Staying overweight the sector for now with an 8% – 12% weighting. However readers should note today’s trading action wasn’t a positive. Sentiment has turned decidedly negative and that is a plus.

Clients had a 3% – 5% weight in the sector last year, after avoiding the sector entirely for years, and that was lifted to 8% – 12% late in 2016, early 2017.

(Positions can change at any time, and for any reason.)

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