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Energy Sector Is Heating Up

Feb. 04, 2019 5:58 PM ETXLE
Clif Droke profile picture
Clif Droke


  • Despite last year's oil price plunge, energy company earnings are strong.
  • OPEC production cut is beginning to benefit crude oil prices.
  • Energy stocks are poised to benefit from an oil price rally.

After the steep plunge in oil prices last year, many participants are inclined to ignore the beaten-down energy sector. Negative forecasts still abound among oil analysts, and some commentators have even called for short sales on crude oil despite its fourth quarter 2018 crash. As I'll argue here, though, the evidence - both technical and fundamental - strongly suggests that the energy sector is a buy and will surprise many observers with a strong performance in 2019.

For energy investors, 2018 was a year they'd like to forget. While Brent crude averaged $72 per barrel in 2018, according to the U.S. Energy Information Administration (EIA), oil prices finished the year lower than they started it. From a high of just over $75/barrel for West Texas Intermediate (WTI), crude oil prices fell dramatically in the fourth quarter, with WTI hitting one of its lowest levels in years at $43/barrel in December.

Crude Oil Prices

Source: Energy Information Administration

While oil's price performance last year was something most traders would like to forget, 2018 was in many ways a landmark year for the energy sector. According to EIA data, the U.S. surpassed Russia and Saudi Arabia early last year to become the world's largest crude oil producer based on monthly production statistics (below).

Global Oil Production

Source: Energy Information Administration

Meanwhile, crude prices have recovered some of their losses since December's low, with WTI hitting a 1-month high of $55.26 as of Feb. 1. The oil price rally since late December was partly a result of the market being technically "oversold" and short-covering has been clearly evident. From a fundamental standpoint, the production agreement announced Dec. 7 by OPEC and other countries, including Russia, would limit production by 1.2 million barrels a day from last October's levels. The agreement extends into the first six months of 2019.


This article was written by

Clif Droke profile picture
Clif Droke is an equity research analyst and writer for Cabot Wealth Network. He has covered equities and commodities, specializing in gold, since 1997 and is the editor of the Cabot SX Gold & Metals Advisor.

Analyst’s Disclosure: I am/we are long SPHQ, IAU, XLE. 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.

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