Weekly Oil Markets Recap - Outperformance Comes From Conviction And Patience

Summary

• WTI finished the week higher by 2.38%.
• Energy stocks are now climbing the leaderboards.
• Outperformance doesn't come easy, it takes conviction and patience.
• And ultimately, the big gains are made by those who are right and sit tight.
• We see more outperformance ahead for the energy sector.

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

WTI finished the week higher by 2.38% and another multi-year high.

Not only is oil regaining multi-year highs, the HFI Portfolio and energy stocks are moving higher as well. As we wrote in a daily this week titled, "Leaderboard Change: Energy Stocks Climbing To The Top." There has been a not so subtle shift in the market leaderboard in April, and energy stocks are now climbing to the top.

Not only has the recent climb put energy stocks (XOP) near the top of the leaderboard, but the outperformance in XOP to the S&P 500 (SPY) has now broken out of the downtrend since late 2014, something we think all investors should keep a close eye on.

But now with energy stocks outperforming the broader market, the relative outperformance didn't come easy. Just 3 months ago, the investment community still didn't believe that oil prices could remain above $60/bbl and energy stocks were cast aside and left dead. The divergence became so large that we published multiple articles to address just how ridiculous the divergence was getting:

• The Last Time Energy Stocks Underperformed This Bad, They Went On To A Multi-Year Bull Market
• Investors Have Been Comforted By 3 Decades Of Low-Interest Rates. What If All That Turns Upside-Down?
• Price Reflexivity - What's It Going To Take For People To Wake Up To The Potential Of Higher Oil Prices For Longer?
• This Small-Cap Oil Producer Is Too Cheap To Ignore
• Buy Canadian Heavy Oil Producers As The WCS-WTI Discount Narrows

And even as we write this weekly oil markets recap, the energy sector as a whole remains undervalued. Most energy names are still pricing in 0% probability of higher oil prices for longer. Conservatively speaking, the energy names we track are trading at an average discount to STRIP of ~15% with some names so ridiculously cheap, like Gear Energy (OTCQX:GENGF), that you would need draconian assumptions to justify the price it trades at today.

While some of our other holdings like California Resources (CRC) is finally starting to get the respect it deserves. Just 6 months ago, most believed that the company would go bankrupt due to its debt load, but a close examination of the balance sheet along with the cash flow generating ability of the company should've cast those concerns aside. In addition, we held a macro view on oil prices while many didn't, and that's what truly differentiated our thinking on CRC.

Outperformance doesn't come easy, it takes patience and conviction

In the world of investing, you will almost always encounter people that boast about how they forecasted the upcoming oil bust or boom, or how they supposedly made money by trading in and out of stocks. But at the end of the day, the big gains are made by those that are right and sit tight.

As Jesse Livermore once said:

Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn.

But as Livermore said, the reason this is one of the hardest things to learn is that of the constant self-doubt that the market exerts on you. Just when you think you are at the top of the world, the psychological downfall tears your confidence into pieces and sends you into the opposite extreme - fear. But it's precisely at times like this that you have to exert patience and conviction. Understanding the key variables to make an investment work is what will ultimately drive long-term outperformance.

It's easy to get overly optimistic just as it's easy to get overly pessimistic. So we urge readers to take things one step at a time and exert both patience and conviction in periods of good and bad.

And for the long forsaken energy investors, the time of overly pessimistic thinking may be coming to an end. As the oil thesis continues to point in the right direction, and the start of the positive reflexive feedback loop, we believe the outperformance in energy stocks has only just started.

As we said at the end of 2017 in our favorite article:

What Does This All Mean for Oil Prices Going Into 2018?

We think it's going to be the golden year. After years of torment, research, and patience, 2018 will be the fruitful year we have all been waiting for. It will be the inflection of all inflections. Inflation will promptly move higher just as the Federal Reserve starts to raise interest rates. Global synchronized growth will ripple through the economies, and oil demand will prove to be stronger than expected again.

We hope you are ready, and as we have been saying to our subscribers repeatedly over the last month - head down, plow through. The road is still long ahead.

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Analyst’s Disclosure: I am/we are long CRC, GXE.TO, CVE.TO, OIH, XES. 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.