XOP Is A Buy: The U.S. Energy Policy Continues To Support Gains
- Crude oil probed above the $80 level on Brent and could be heading for levels not seen since 2014.
- The bull continued to roar in the natural gas arena as the price probed over $6 and continues to make higher lows and higher highs as the winter peak season.
- Energy-related stocks have underperformed the overall stock market for a long time.
- XOP is a traditional energy ETF product that could offer substantial rewards as it remains inexpensive and looks likely to outperform the overall market.
- The risk in XOP is limited based on soaring earnings as traditional energy prices rise.
- Looking for more investing ideas like this one? Get them exclusively at Hecht Commodity Report. Learn More »
We have seen lots of turbulence in markets across all asset classes over the past weeks. The stock market made its first significant move lower on September 20. Last week, on September 28, it fell again but did not reach a lower low. End of the quarter window dressing may have saved stocks.
Meanwhile, the bond market vigilantes appear to be back, pushing bonds lower and yields higher as the Fed prepares to taper QE. Gold and many other commodity prices have been moving lower as the dollar index moved to a new 2021 new at over the 94 level.
Crude oil and natural gas futures have mostly ignored the price action in many other raw material markets. The November NYMEX crude oil contract rose to a new high, Brent probed over $80 per barrel, and natural gas surged to over $6 last week. Traditional energy companies stand to earn substantial profits from the rise of oil and gas. Energy-related companies have lagged the stock market for months and years. The greener path to US energy production and consumption has weighed on prices. However, growing profits could push the sector higher as it remains inexpensive compared to the rest of the stock market.
The SPDR S&P Oil and Gas Exploration & Production ETF product (NYSEARCA:XOP) holds shares in many leading US companies exploring and producing crude oil and natural gas.
Crude oil is heading for triple digits
Nearby NYMEX crude oil futures settled at over $75 per barrel at the end of last week.
The monthly chart shows that the energy commodity moved marginally above the October 2018 in early July when it reached $76.98 per barrel. The net technical target stands at the 2014 high at over $100 per barrel. The trend has been higher in the crude oil futures arena.
The quarterly chart highlights six consecutive quarterly gains as of the end of Q3 2021.
Meanwhile, Brent crude oil moved to a new high at the end of September when the price probed above the $80 level for the first time since October 2018.
The long-term chart of the now active month December Brent crude oil futures contract shows the move to a new high at $80.75 per barrel last week. The upside target stands at the October 2018 $86.75 high, a technical gateway to a move to the 2014 peak at over $100 per barrel.
At the end of last week, the trends in NYMEX and Brent futures remained higher.
Natural gas has been parabolic
Natural gas has a long history as a wild market with lots of price volatility. Since the NYMEX began trading futures in 1990, the price has ranged from a low of $1.02 to a high of $15.65 per MMBtu. The natural market has changed dramatically over the past three decades. Discoveries of massive reserves in the Marcellus and Utica shale regions of the US made the nation a producing powerhouse. Technological advances in fracking lowered output costs and weighed on prices. Since necessity is the mother of invention, natural gas replaced coal in US power generation, and the ability to turn gas into liquid for export expanded the US natural gas market beyond the pipeline limitations. Liquid natural gas now travels the world via ocean vessel to regions where the price is far higher, creating a robust export business for the US.
The rising production weighed on the price of natural gas futures, sending them to a quarter-of-a-century low in June 2020 when nearby NYMEX futures reached a bottom at $1.432 per MMBtu. Value investor Warren Buffett gave the energy commodity a vote of confidence when he paid Dominion Energy (D) $10 billion for its natural gas transmission and pipeline assets., increasing Berkshire Hathaway’s control of interstate natural gas transmission from 8% to 18%. The deal came as the price hit the twenty-five-year low. Since then, natural gas has made higher lows and higher highs until it exploded higher over the past months.
The chart illustrates natural gas’s parabolic move that took the price to the highest level since February 2014 last week as the price reached $6.318 per MMBtu. Natural gas moved over 4.4 times higher since Mr. Buffet invested $10 in a pick and shovel play on natural gas transmission.
Natural gas and crude oil futures prices are benchmarks. In oil, the futures reflect the price at the Cushing, Oklahoma pipeline. Brent is the benchmark for crude oil in the North Sea. In gas, it is the price at the Henry Hub in Erath, Louisiana. Other locations trade at premiums or discounts to the futures benchmarks. Oil and gas prices in Europe and Asia are booming, and at record highs as shortages are developing. While prices have reached multi-year highs in the US, they are at even higher levels overseas.
Last week, in an interview on CNBC, Mark Fisher, a successful energy floor trader who made a fortune in the oil and gas pits on the NYMEX, told the interviewer that a cold winter in the US could push prices much higher. He could see natural gas moving to over $10per MMBtu, a level not seen since 2008.
The energy sector has been lagging the stock market
Energy-related stocks have lagged the stock market over the past years. Addressing global climate change has made investing in fossil fuels taboo. The Biden administration’s energy policy has curtailed US output. On his first day in the Oval Office, the new President signed an executive order canceling the Keystone XL pipeline. In May, the administration banned drilling and fracking for oil and gas on federal lands in energy-rich Alaska. US energy policy has handed the pricing power in the oil market back to OPEC+. In natural gas, Russia is a huge producer that is now seeing its position rise in Europe and worldwide as US regulations weigh on production.
US energy policy has many traditional oil and gas producers scrambling to move into alternative energy production. No new companies are coming into the fossil fuel arena, given the risks created by the Biden administration’s approach to energy. However, hydrocarbons continue to power the world. Those companies with a footprint in the US crude oil and natural gas sector are experiencing a profit bonanza likely to lift their share prices that have lagged the overall market.
XOP holds shares of the leading US energy-related companies
The fund summary for the SPDR S&P Oil and Gas Exploration & Production ETF product states:
XOP’s most recent top holdings include:
At $99.24 per share on October 1, XOP had $3.9 billion in assets under management. The ETF trades an average of over 7.866 million shares each day and charges a 0.35% management fee. The blended dividend was at the $1.35 per share level, equating to a 1.36% yield. Holding the ETF for four months pays for the management fee.
XOP is an ETF product with exposure to companies that stand to reap the rewards of higher oil and gas prices.
Levels to watch in XOP
XOP’s trend has been bullish since 2020, when oil and gas prices reached lows.
The chart highlights the rise from a low of $29.48 in March 2020 to a high of $100.43 per share last week. While XOP has over tripled in value, the rally may just be getting underway if oil and gas prices continue to rise.
The long-term chart shows the current technical target stands at the 2018 $181.80 high. NYMEX crude oil and natural gas prices have already risen above the 2018 peaks. XOP’s next upside level is at the 2014 $336.16 peak.
There is lots of upside potential for the XOP, but as Yogi Berra once said, “The future ain’t what it used to be.” The greener path for energy production and consumption will impact the markets over the coming years. However, the present depends on fossil fuels. US energy policy has handed pricing power in oil and gas back to OPEC+. After years of suffering under lower prices because of the rise of US shale production, the cartel and Russia are now positioned to fill their coffers as prices rise. The cartel’s mission is to achieve the highest possible price for its members. Oil-producing countries would rather sell one barrel at $100 than two at $40. And, Russia would like nothing better than to squeeze higher natural gas prices from Europeans that depend on the Russian pipeline for the energy commodity.
The companies that produce hydrocarbons are cashing in at higher prices. As profits rise, the bullish trend in XOP should continue.
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This article was written by
Andy spent nearly 35 years on Wall Street, including two decades on the trading desk of Phillip Brothers, which became Salomon Brothers and ultimately part of Citigroup.Over the past two decades, he has researched, structured and executed some of the largest trades ever made, involving massive quantities of precious metals and bulk commodities.
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Andy’s writing and analysis are on many market-based websites including CQG. Andy lectures at colleges and Universities. He also contributes to Traders Magazine. He consults for companies involved in producing and consuming commodities. Andy’s first book How to Make Money with Commodities, published by McGraw-Hill was released in 2013 and has received excellent reviews. Andy held a Series 3 and Series 30 license from the National Futures Association and a collaborator and strategist with hedge funds. Andy is the commodity expert for the website about.com and blogs on his own site dynamiccommodities.com. He is a frequent contributor on Stock News- https://stocknews.com/authors/?author=andrew-hecht
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