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Weekly Oil Markets Recap - Energy Stocks Aren't So Hated Anymore

Apr. 15, 2018 9:30 AM ETCRCQW, GENGF, SPY, XLE, GXE:CA43 Comments


  • WTI finished the week up 8.59%, the best weekly performance this year.
  • Energy stocks have managed to outperform the broader markets by 9.8% since the middle of March, the steepest and fastest outperformance since the oil downturn.
  • Many of the energy stocks also catapulted higher, but remain materially undervalued.
  • While this week offered a glimpse of hope for tired and worn out energy investors, the journey is just beginning.

Welcome to the weekly oil markets recap edition of Oil Markets Daily!

WTI finished the week up 8.59%, the best weekly performance this year.

Market participants attributed the oil rally to:

  • De-escalating global trade war talks.
  • Geopolitical.
  • Or a combination of the two.

But for those that casually ignore the oil market fundamentals, the bullish fundamentals are only going to get louder from here. This is why on Friday, we published our hit piece, "The Oil Bull Thesis Is Just Getting Started." To sum up that article into one sentence, "Oil prices will rise as global oil storages fall into steep deficits by the end of 2018."

So for now, attribute whatever you want the price rally to, whether it's geopolitics, Saudi jawboning, or de-escalating global trade war talks, the fundamentals will speak loud enough soon enough.

But it was energy stocks that took the spotlight this week...

This week saw HFI Portfolio notch the best weekly performance since inception. The combination of a 23.94% rise from California Resources (CRC), and 13.33% rise from Gear Energy (OTCQX:GENGF) (GXE.TO), our number 2 and number 1 positions, respectively, boosted overall performance higher.

But for readers surprised to see such a steep upward correction, you shouldn't because we've not only written to subscribers that the names were cheap, but we also made these articles public as well.

And even as these names ascend upwards, they are still below their intrinsic value.

For the rest of the energy sector, this week saw another week of higher relative outperformance. We wrote in our last week's weekly recap that energy stocks saw

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This article was written by

HFIR profile picture
HFI Research is focused on investment ideas within the energy sector. The goal is to find contrarian opportunities in the oil and natural gas markets. Members of the investing group Learn more.

Analyst’s Disclosure: I am/we are long XES, OIH, GENGF, CRC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (43)

Darp Research profile picture
HFIR you have been proven right again, oil and oil stocks taking off big time, and the underperform of oil stocks to oil is over too. Big Kudos!! Thank you for your work.

Will kudo myself a tad too. On April 5th the first trading day day after April 2 XLE bottom said this:

"Well seems to me this is it, that the oil stocks underperform for many months is converting into an over perform, the shift is taking place now.
In first 3 weeks on March is was possibly every day and sometimes by huge margins that oil did better than oil stocks. In last week of March that started to seesaw, now today XLE up 2.0% and USO down by .08, HUGE outperform by stocks.
TUWOY and APA making new 1 month highs here, and XLE just pennies away from same, while oil is about level. Is this is? Think so.
Apr 5, 2018. 11:43 AMLink
Weekly Oil Markets Recap - What Are Energy Investors Waiting For Exactly? - HFIR"

Had a feeling, well nailed it to the day, and have been nicely rewarded since that day in my accounts.

Thanks again for your great work, it helped me go big on bottom call.

Stadtmueller Von Texas profile picture
CRC was not on my radar until I saw it mentioned several times on Seeking Alpha, so I checked it out. Conclusion, it is really struggling , plus all of its operations seem to be in California ( What could possibly go wrong there?)
At any rate I am considering placing a limit order to sell a naked Put on 200 contracts as follow's: $12.00 strike Aug 17, 2018 Expiry $4.00 premium. If filled I would collect $80,000 in premium, if assigned I would pay $240,000 for 20,000 shares of CRC with my net cost @ $8.00 per share, then probably sell a covered call @ about $16/18 range. I doubt this will fill with these numbers, but earning's report is May 3rd, and doesn't look that good. Its 91% volatilely also noted along with its 52 week high/low.

feels like rotation is coming from banks not FAANG
Good week.

Looking forward to more.
The graph on the cover of the Wall Street Journal (Friday, April 13 issue) may be all we need to know about oil price.
Stadtmueller Von Texas profile picture
Other than swing trade USO on large pull backs all I do is sell naked puts OTM Holding several now. Example: on Feb 26 I sold 300 contracts of APA $32.50 strike Oct. 19 2018 collected $84,000 in premium , as of Fri close I am up 61% and APA hit $41.00 . My breakeven is $29.70. Can buy back @ about 30% now but will probably hold as I expect APA will hit $45.00 in a few weeks then I can buy back the $2.80 premium for about 0.25 cents. I never buy long calls any more as I finally figured out 80% of them do expire worthless. When you sell a put only 2 things can happen. It expires worthless to the buyer (you are the seller) & keep the premium, or you get assigned the stock at a deep discount & sell a covered call, collect more premium or just sell back into market, if its a good high dividend stock say like BP or RDS/A then its even sweeter. Other than geo-political only 3 things control the price of crude. (1) Global daily demand,(2) Global daily production, & (3) how much is in storage globally. # 3 is what the smart money watches & HFIR is the best in the business in all three.

The journey better just be starting.
Which is more powerful hate or greed? We are about to fund out. As always great analysis HFIR
Energy stocks are still a fraction of where they were the last time Brent was over $70 and if you look across the fund space energy names are non-existent, so I'd say we still are in the "hated" category and have a long way to climb before that reverses
ofirm profile picture
you forget that most of the energy companies diluted their shareholders
or/and had debt grows or grew production and spent most of their most
valuable lands on efforts to stay afloat. these companies are not the
same companies they were 4 years ago.
johnny..cage profile picture
Many will buy back shares as times get better some have started. Most shale companies will forever dilute, true at 100 as it was at 37.
The ones i own have had little to no dilution, and if they did dilute some it was to buy massive assets at reduced costs.
Even though I am a huge fan of HFIR and fully subscribe to the longer term strategic vision for oil, putting on my 'tactical' hat Friday, I have sold about 30% of my CRC and about 65% of my OXY (the safest way to play this move IMO) and about 70% of my OXY June 70 and 80 call options, with a view to buying them back cheaper over the next week or two. We are short term over bought, with negative MACD divergences in all the shorter term charts, that is price is higher but MACD is lower.
Doesn't mean we can't go higher on Monday still, and exceeding the highs of January is still the short term target over the next few weeks, but odds are we have a bit of a pullback this week. I will keep winnowing if we keep rising, as this will not be a one way moon shot, but lots of to-ing and fro-ing. Just remember what happened in January, when I sold most of my position, just a bit too soon and bought back a bit too soon, as well, but the volatility has not disappeared and is actually a wonderful opportunity to squeeze as much out of this move up as possible.
How much of CRC's rally has been a short squeeze? Or is that still to come? I trimmed a very small portion of my CRC Thursday. Will rebuy the next dip.
I would say the shorts are a significant factor with CRC. The last plunge after the January highs got a lot of shorts onboard. CRC sometimes seems to move to its own drummer, partially owing to the fact that it sells in Brent, not WTI, and also the fact that it is a hugely levered bet, but I have found it to be a reliable early indicator - super sensitive - of moves both up and down.
johnny..cage profile picture
Iran deal gets cancelled expect a short squeeze. There are many decent energy stocks laden with shorts. Put this in your pick thesis as we move thru May.
Several reasons oil will surge: 1) demand increase 2) Trump will rip up the the Iran deal 3) tension in the Middle East 4) commodities are cyclic and mean reverting always overshooting for a period of time.

I have been through this 3 times, and every time people are in denial it will happen.
BJA-2 profile picture
It still seems the price of some energy stocks are out of whack with the market value of their reserves. Case in point, a few weeks ago, MCF sold 1% of their production and 2% of their reserves for a price that appeared to amount to 12% of their enterprise value.

If valuations like this are common, it will encourage numerous mergers or asset liquidations of smaller publicly traded companies.
I am really surprised we haven't seen more M&A. If large E&P companies wait until Q1 earnings the valuations are going to be less favorable for the acquiring company
ofirm profile picture
most large e&p companies reduced capex and have enough
prospective projects to fill their capex for many years. when
you see higher capex, they will add more projects (via m&a).
Calculus profile picture
"once bit twice shy." not nearly as bad as gold stocks or even worse coal stocks which were utterly obliterated during the whole Ukraine thing.

Oil as a commodity has clearly been a big winner during the entire War on Terror "thing" though clearly not without some incredible volatility.

Long Tesla.
Strong buy.

Surging gasoline prices following an actual cut off of supplies after the Hurricanes last year continue to be the gift that keeps giving.

Oil longs might be dramatically disappointed come tomorrow given the "non response" response to Syria. Certainly one quick read of the comment section at SA says "no shortage of dumb money here" certainly.
"Oil longs might be dramatically disappointed come tomorrow given the "non response" response to Syria"
oil did not grow due to the potential escalation of the conflict in syria. oil grew due to attacks by the Shiite rebellion in Yemen on Saudi Arabia and Aramco
ofirm profile picture
and you forgot to say that KSA will use the large Sunni majority
in the oil rich parts of Iran to sabotage their production too.
both countries have a huge weakness - KSA has large Shiite
population in their oil production areas and Iran has large
Sunni population in theirs...
murjames profile picture
you have seen nothing yet as Syria is just the beginning. The cutback in funding for oil exploration has created the perfect storm and a bull market has just started in oil and a year from now will see even better prices. Major funds are slowly taking a position and when it starts to accelerate watch out.
I think we will see a small 1-2% oil price drop on monday as tensions fade. Then hopefully up again.
johnny..cage profile picture
I would tend to agree although we are beginning a sector rotation with acceleration on declines Q2-Q4, accelerating failed state VE and tensions with Iran at a peak with Russian decredibilized on Syria and Euro’s now partnering in to address the issue. Iran’s moves to throw a crescent around KSA to eventually take over are a disaster to humanity in the ME and a scab on mankind. New sanctions are on the way the only thing that will stop them is regime change within Iran. I can see sitting out for a half a day but every day there’s a new element coming in which makes that difficult.
Called it! ;)
johnny..cage profile picture
Somewhat. Equities are up today. They have quite a bit of catching up to do here.
whats going on with wcs ? seems the gap has gotten much smaller , why is that ?
At least partly due to falling Venezualan imports of heavy crude and a bit higher amount of oil by train exports from Canada. We may also be getting to an inflection point with the Trans-Mountain pipeline expansion, with the company threatening to abandon it and PM Trudeau giving up photo ops in Peru to try and negotiate a deal between Alberta and BC governments, so it can clearly proceed. Also native-led consortium for a pipeline to Burnaby across native territory is gaining traction, along with growing resentment of US money pushing an end to any and all pipelines in Canada. American domination is a powerful theme in Canadian psyche and can cause pushback against both Trump and against US environmentalists who may have over-played their hand in BC. Any sense of a change in pipeline politics will cause Canadian oil stocks to pop eye-poppingly!
KM,I an American company, is trying to expand a pipeline in Canada. TransCanada, a Canadian company, was trying to expand a pipeline in the US. Until Trump became President XL was like TMEP is today. Tit-for-Tat!
Alberta introduced legislation today that would give the province power to restrict flow of oil, gas. This will reduce the spread between WCS and WTI or cause an increase in WTI price (or some combination of both scenarios).
Neo-Me profile picture
Excellent analysis. What would happen in terms of oil price if the US-China trade war move forward? What would happen if the US sanctions against major Russian oil companies? Thanks.
Russia will increase direct pipeline deliveries to China.
Sustained global trade wars would cut economic growth, thus reducing oil demand, thus reducing oil price.
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