The focus is back on crude oil prices following the UN vote to enact a no-fly zone in Libya. The action was taken to protect the civilians and rebel forces in Libya. The immediate response was an increase of nearly 2% on the price of crude. How this plays out will take time, but it adds another layer of worry relative to the global markets.
The question once again is raised relative to the impact on the consumer. Prior to the earthquake in Japan last week this was the focus of the markets. What is the threshold of pain for the consumer? Will they stop spending if gasoline hits $4 per gallon? If the rise in oil continues at this pace we will find out soon enough. One thing is certain, higher gasoline and energy prices impact consumer spending short term.
Last night we added Energy, Oil Equipment and Oil Services sectors back to the watch list to add additional positions in this sector. Breaking the sector down is the key to finding the leadership. The following are 4 charts to watch for upside opportunities relative to the energy stocks.
Dow Jones U.S. Energy Index
As you can see the uptrend line was broken last week, but held support at the 622 level. A sustained move back above the 649 level would be a good point to add the sector to your portfolio. The outlook remains positive as does the ability for crude to sustain the $100 level short term. iShares DJ US Energy ETF (IYE) is the corresponding ETF for the index.
Dow Jones US Oil Equipment & Services Index
The chart looks very similar to the overall energy index chart above. The reason being this sector has been the leader. The uptrend line was broken on the recent sell off in relationship to Japan and world events. However, support at the 660 level has held and the push back towards the February high is in progress. This is another sector worthy of watching to add to portfolios on a sustained move above 689. iShares Oil Equipment & Services ETF (IEZ) is the corresponding ETF for the index.
United States 12 Month Oil Fund ETF (USO)
The chart below is USO, the 12 month average contract on crude oil. This takes some of the volatility and contagion out versus owning USO, which is the front month contract. If you want to trade oil use USO and if you want to own oil long term use USL. Both funds distribute a K-1 for tax purposes and thus buying the shares in a qualified account avoids this issue. For the near term the trend on oil is higher and the unrest in the Middle East isn’t going to be resolved anytime soon. Thus, the outlook for the next 3-12 months is for oil to move towards the $125 level. Thus, owning oil is a logical move near term.
Tesoro Corporation (TSO)
The refiners accelerated in the uptrend after a short term pullback in January. What changed? The price of gasoline started to rise faster than the price of crude oil. That left bigger margins for the refiners to make money. But, in mid February the price of crude started to accelerate again relative to the geopolitical issues in Egypt. Since the refiners have been volatile as investors wait to see if the earnings and margin growth continues relative to the price of crude. Tesoro has been one of the leaders along with Volero (VLO) and Sunoco (SUN). The chart below of Tesoro shows the consolidation range with the price currently at the top end of the range. Look for the break through the top of the range if the trend is to resume. A break on above average volume would be a opportunity to add the stock to your portfolio short term.
(Click to enlarge)
The energy sector offers many opportunities if the price of crude continues to move north. In fact if it moves higher too fast, the impact to the consumer will become a rising concern for the balance of the market. The sector remains an opportunity for investors, but a challenge for the consumer side of the equation.
Disclosure: I am long TSO. Moneys Strategies, Inc. Clients may or may not own some of the positions mentioned in the article.