Oil stock drill-down

06/07/19
  • Crude oil off more than 20% since late April
  • Market has given back more than 60% of early 2019 rally
  • Many oil stocks have outperformed crude during latest drop

Energy sector traders know that as goes oil, so goes their stocks.

For the most part.

Case in point: Crude oil’s recent descent from its late-April high, which at Wednesday’s low of $50.60/barrel had nearly reached -24% in the July WTI crude oil futures contract (CLN9):

July WTI crude oil (CLN9), 12/20/18–6/6/19. Crude oil futures price chart. Oil gets “risk-off” treatment.

Source: Power E*TRADE


The move also erased nearly two-thirds of the market’s rally off its December lows, as prices blew past potential support levels like they were stop signs on the Autobahn.

Before we get too far into things, a little refresher on two basic oil-market (and energy stock) principles:

Crude oil is a global economic barometer: The brighter the perception of the global economy, the greater the demand for oil, because more economic activity requires more oil. The gloomier the economic outlook, the less demand for oil.

Mo’ oil buying, mo’ money: Higher oil prices typically translate into higher profits for oil companies, which can translate into higher prices for oil stocks. Lower oil prices…

You know the drill. There are plenty of things that can disrupt these basic relationships at any given time, or for a specific oil company, but these are the broad strokes that paint the industry.

Recently, we’ve been in a situation where uncertainty about the global economic outlook has fed a “risk-off” mood, resulting in the dumping of both stocks and crude oil. No surprise there. It’s also a good bet that a truly clear, decisive resolution to the trade war and tariff situation (or a believable pledge to resolve it) would trigger a “risk-on” moment that would drive equity and oil prices higher.

Barring that—and the markets have been waiting a while—traders need to look at the markets themselves for signals of when the worm may turn.

In the case of crude oil, a market-wide risk-off mentality has coincided with a recent increase in the commodity’s supply—Wednesday’s report on US crude stockpiles, for example, showed a 6.8 million barrel increase from the previous week, which is around 11% more than year-ago levels.1 Crude bulls haven’t been able to catch a break lately.

July WTI crude oil (CLN9), Exxon Mobil (XOM), Chevron (CVX), ConocoPhillips (COP), 4/23/19–6/6/19. Energy stocks price chart. Oil vs. oil stocks.

Source: Power E*TRADE


Oil stocks have been a different story, though. The chart above compares the July crude oil futures to three big oil stocks—Exxon Mobil (XOM), Chevron (CVX), and ConocoPhillips (COP)—since April 23. All three stocks have sold off much less than oil during this period, and two of them have actually rallied since May 31 even as crude continued to slide (although the market turned positive yesterday afternoon). Yesterday morning, CVX’s percentage loss since April 23 was less than a tenth of crude oil’s.

It’s not illogical to think that some resilient oil stocks may fare better than others if traders and investors decide to put on their “risk-on” pants again and drive a rebound in equities and oil. But when?

Looking again at the oil chart, many traders will likely notice how close crude is to the big, round-number price of $50. Markets tend to like big, round numbers, which can often assume psychological importance simply because they provide quick reference points, or milestones (think about how many times have you’ve heard someone reference “Dow 25,000”).

A break below $50 in the crude market would almost certainly trigger a flurry of financial headlines, but below that level there are two other price zones traders are likely watching. The most obvious is the market’s December low a little above $44, but the second is the 76.4% retracement level (a less-commonly-referenced Fibonacci retracement percentage) of the December-April rally around $49.50—yep, just a little below that big, round number.

Crude appears to be very near levels where many long-time traders may expect a rebound, and stranger things have happened than for a market to scare traders by breaking below a “key” level, only to quickly reverse to the upside—aka, a “bear trap.” Whether that key level is around the $49.50–$50 level or the contract lows around $44—or in between—is another story.

Today’s numbers (all times ET): Employment report (8:30 a.m.), Wholesale Trade (10 a.m.), Baker-Hughes Oil Rig Count (1 p.m.).

Today’s IPOs: Revolve Group (RVLV).

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1 Econoday. EIA Petroleum Status Report. 6/5/19.

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