Seeking Alpha

Energy Sector: Overbought, But It May Not Matter

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Includes: BNO, BOIL, DBE, DBO, DBRT, DCNG, DGAZ, DNO, DTO, DWT, FUE, GAZB, GRN, JJE, KOLD, OIL, OILD, OILK, OILU, OILX, OLEM, OLO, ONG, RJN, SCO, SZO, UBN, UBRT, UCO, UGA, UGAZ, UHN, UNG, UNL, USAI, USL, USO, USOD, USOI, USOU, UWT, WTID, WTIU
by: Brian Gilmartin, CFA

Bernie Schaeffer of Schaeffer's Investment Research published this piece on Sunday, April 15. (See below the dotted line.)

So far the bulls have carried the week, though.

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"And while we're on the topic of XLE extremes, we would be remiss not to point out that, following a 17.68% decline in the reporting period ended April 1, short interest on the energy fund is now at its lowest point - just 18.49 million shares - since September 2009.

The combination of unusually high call open interest relative to put open interest, fairly robust inflows, extremely low short interest, and a sustained net-long extreme in crude futures would seem to indicate, - without making too many leaps in critical thinking - that oil enthusiasts are out in force right now, with bullish bets blazing. And these speculators would no doubt be pleased to learn that data from Schaeffer's Quantitative Analyst Chris Prybal points to yet another XLE extreme that could be in the process of playing out. Namely, since inception, the fund has delivered its biggest average monthly return of the year - a gain of 3.4% - during April.

Setting that positive seasonality aside (which seems prudent enough at the moment, given a fundamental backdrop driven, to a non-trivial extent, by rapid-fire Trump tweets), we'd issue a word of caution on buying the rally in XLE right here and now, as the fund has yet to "prove its mettle" by reclaiming a foothold above its year-to-date breakeven level at $72.26. Potential support here was previously tested back on that memorable day of Feb. 2 before promptly being broken in the next session, and - with so many oil bulls already "all in" on this fledgling leg higher - XLE may struggle to drum up the additional buying pressure necessary to make its way back into the black for 2018."

xle 50-day 80-day moving averages

Here is the Energy sector's expected earnings growth over 2018:

  • Q1 '18: +71.4%
  • Q2 '18: +118.8%
  • Q3 '18: +78.7%
  • Q4 '18: +51.9%
  • Q1 '19: +18.9%

Source: Thomson Reuters IBES's "This Week in Earnings" dated 4/13/18

Conclusion: Energy's market cap weight in the S&P 500 is down to about 6% from the 14-15% in 2012, 2013, and so much of that is Exxon (NYSE:XOM) and Chevron (NYSE:CVX).

I missed the move for clients and readers and have no positions that are Energy-related at present.

My own opinion - and it could be very wrong - is that so much of crude oil pricing could be influenced by the Saudi Aramco (ARMCO) IPO, due out early 2019 (maybe ?).

This will be the largest public company in the world - Wikipedia had Saudi Aramco's 2005 revenues at $781 billion - wow.

As a private company, Saudi Aramco is the largest in the world.

Having owned Energy in the past for clients, I've found it a frustrating long. The Energy stocks don't seem to correlate with Energy earnings and revenue growth.

Nice call by Bank Credit Analyst's commodity analyst Robert Ryan on the sector.

Thanks for reading.