Oil / energy is reaching an attractive entry price point again. At ValueTrend, we’ve been looking for a pullback on oil into the $45 zone to increase our exposure to energy. We had a certain level of confidence that it would do so as oil came into its second seasonal buy period – the first being from February to May. Following the first seasonal period of strength, energy & related stocks can be a bit soft through late June to the end of July. It can then stage a second-leg rally from late July into October (see Thackray’s Investor’s Guide).
The chart below shows us that WTI was indeed getting a little overbought as it played with $50/ barrel in June, and probably needed to pull back. Right on schedule, it is reaching $45 support as we enter the second half of July. The market looks for an excuse to drive pricing in a direction that charts suggest possible beforehand. This time, it was greater than expected gasoline production by US refiners. We’ve heard this song before. I’ve previously noted $44-$45 as a support level on this blog. My mid termed target for WTI oil is around $60 in the coming 6-12 months. From there, the fundamentals and technical will have to be evaluated before prognosticating towards further upside.
The iShares Capped Energy ETF (XEG-T) suggests less weakness in the producers. However, there should be a certain level of negative follow-up by the producers if oil pricing remains soft for the remainder of this month. We’ve recently added one energy stock to our portfolio – as seen on our BNN Top Picks segment last week. If you missed it, here is a link to the entire show, which includes the top Picks segment.
We are about 8% directly exposed to energy stocks via XEG and our Top Pick Vermillion Energy right now. We expect that exposure might increase as/if/when energy stocks shrug off a little momentum in the coming weeks.
Instead of using XEG.TO what are your thoughts on HEE.TO?
It is an ETF with a covered call option.
Covered call ETF’s are excellent for income and most of the upside of a sector or market–however, there is a cost to writing the calls (higher MER) and if the market begins moving quickly, the stocks start getting called. Thus, the ETF doesn’t get all of the upside as they frantically try to re-buy the stocks after having to sell them to the call holders.
So it depends on how fast you think that market will move. Normally, a gently rising market (or better still a flat market) is ideal for call writing.
Today (July 27), WTI touched 40.20. However XEG only moved down 0.5%. I plotted XEG together with USO and was surprised to see that XEG is holding up very well relative to the recent OIL pullback. Is this relative strength what you refer to when saying “when energy stocks shrug off a little momentum in the coming weeks”?
Also, a comment: I wish there was a way to buy the WTI ticker in Canada, to capture the price movement of it, but unfortunately, there is no such product. Even the Horizon non-leveraged ETF doesn’t follow the WTI price movement because of the contracts it holds.
Yes Matt–the only one that truly tracks WSI–well, at least reasonably close–is USO and that trades in US markets
Hi again Keith,
I’d love to see a new blog about WTI oil, now that it has lost it’s 40-42 support. Specifically, it’d be interested to hear how you would buy an oil position from here. We have some support at 36-37 and more support at 32-33. My (novice) plan would be to wait to see if oil goes back above 40 by tomorrow, and if so, buy a 1/2 position, and the rest if oil goes back above 45. Otherwise, wait to see if it goes below 36.00.
Yes WTI looks to be headed back to $37 or thereabouts as you note. We would have to see a stall in its slide, and base and move up from a base before moving in. I bought a stock (VET-T) on the pullback to $44 where I figured support was, it has held its ground so far but i do wonder for how long…so keep your cash before committing, and see if it firms before buying WTI or any energy stocks for a while.