Is oil an opportunity?

February 26, 20206 Comments

Last week, I blogged (and ranted a bit) about the new fad of ESG investing. There is a growing trend for ETF producers to jump on this somewhat hypocritical, yet highly marketable, bandwagon. We’ve had two of the biggest ETF providers contact us recently and try to flog these funds. Rest assured, we didn’t bite – our stance is clearly outlined on that last blog. Clearly, there is a mandate on their sales staff to pump this stuff. Don’t be surprised if your Advisor suddenly recommends such a product to you.

Speaking of pumping…Oil happens to be one of the whipping boys on the list of evils, according to the ethical overlords at the High Church of ESG Investing. Mind you, these moral authoritarians have blessed a few energy producers – see my blog to find out more. A reader asked me to provide some analysis on the outlook for oil, moral corruption and evils aside. So today, I’ll look at both the commodity, and the energy producers, to see if there are investment opportunities here.

 

The chart above shows us a few things. I’ll bullet-point them:

  • WTI is trapped between about $50 – $65. Therein lies the potential trade.
  • Stochastics suggest an oversold short termed momentum picture. That provides evidence of a potential trade setup.
  • Meanwhile, cumulative moneyflow (first pane below price chart) has improved significantly over the past 4 years. Thats a good mid-long termed signal.
  • Moreover, moneyflow momentum (top pane) has turned bullish. That’s a short termed momentum score for money flowing in.
  • Bottom pane is MACD. Its flat. Nothing to see here, folks. Move along.
  • Seasonality is now in full swing for oil. Buy in February, sell in May.

 

Now let’s take a look at the producers. I’ll use the iShares capped ETF (XEG-T) for illustration.

 

This’d be yer’ basic bullet points on the above chart:

  • Harder to define a trading range on this chart, but there does seem to be significant support at current levels (just under $8/sh.)
  • Cumulative moneyflow is as bearish as all get-out. However, its an ETF, so the moneyflow trend is perhaps less significant than it is for an actual index.
  • Moneyflow momentum (top pane) is kinda-sorta looking like its improving. That’s a definite maybe.
  • MACD, which is a longer termed momentum indicator, is diverging bullishly against XEG. This is significantly bullish.
  • Short termed momentum indicator stochastics is oversold and looking to turn up. That’s encouraging.

Conclusion

WTI looks to me like a decent bullish trading opportunity. We have legged in a bit via an ETF based on the commodity. Meanwhile, the producers look OK, but are not going to be so easily traded as the commodity itself. We have legged in via two stocks in the sector. Seasonality is good from herein, and the sector is oversold. I’m expecting it might be good for a rebound of some sort in the coming months.

 

Housekeeping

6 Comments

  • Keith great topic as I have been wondering what direction oil may take.

    While this next topic is not oil it is intended to provoke some thinking for you.
    I just read your recent Valuetrend update and something you stated got me to thinking. Here is a topic for an upcoming blog.
    Your statement was “Buy & hold portfolios are not appropriate in the late stage of a bull market.” I believe I understand what you are warning. So I was wondering if you may create a blog so as to shed some insight into two things related to preparing our portfolio for the inevitable.
    First item is to detail what you did in 2007/2008 to reduce your risk. Reducing risk implies that you still must hold onto some equity for multiple reasons. But what type of equity did you hold (ie dividend bearing, blue chip, less volatile sectors, low Beta stocks, etc) and how much cash did you start with at the beginning of the turn, and did it grow as the downturn continued? When did you know it was time to leg in? Maybe this blog will bring back fond memories how you prepared and ultimately how your skillset led you to a successful outcome.
    The second item is how might you adjust your portfolio differently with the upcoming correction? Did you learn anything from 2007/08 that you may do differently this time?
    Further if you might is comment on the reasons why you don’t go 100% cash, and how do you decide what equity to hold onto during the correction.
    If you agree with me that this could be an insightful topic, when might you be able to fit it into your schedule? Thanks

    Reply
    • That is a fantastic comment and a great idea for a blog!
      I will do a writeup on that subject next week.
      Thanks for the idea–very good topic, and I’m excited to do it!

      Reply
  • A word of caution on oil for the next couple months. With growth and inflation most likely slowing in Q2 2020 this will put pressure on commodities. The FED would have to be dovish enough to beat down the dollar, steepen the curve, and breath new reflation hopes into market pricing. This is possible, however how powerful is the fed compared to the virus? After a failed normalization of policy are we still pushing on string?

    bob

    Reply
  • Oil has blown through $50 which was previous support Would you wait a couple of more days to see if it can get back to $50? If oil does not get back to $50, then $42 looks to be the next price.

    Reply
    • Yes we are looking to see if this is a “spike” or if its a real breakdown

      Reply
  • I’m avoiding Canadian oil names. Too much bad politics surrounding them. I favour an international ETF like ixc or similar

    Reply

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