Energy company seeks to keep gusher flowing
04/12/18

Don’t look now, but the energy sector is giving off a certain…energy.

Although the sector’s year-to-date performance has been so-so (around -2.4%), it jumped to the top of the S&P 500 sector list in two of the past three weeks, and has followed through on that bullishness so far this week.

Although the energy sector’s week-to-week performance hasn’t necessarily been in lockstep with oil prices (last week crude lost ground, for example), a daily chart of June crude oil futures (CLM8) shows the market yesterday punctured resistance and made a new contract high above $67/barrel after a three-day upswing. That put the market up around 12% on the year.

June WTI crude oil (CLM8) 9/25/17–4/11/18. Daily crude oil price chart.

Source: OptionsHouse


Before drilling further into the crude story, though, let’s turn to energy company ConocoPhillips (COP), which has outpaced crude with an 18% year-to-date rally. The chart below shows yesterday the stock gapped above the resistance represented by its January high (before crude made its move, by the way), and traded to its highest level (around $63) in nearly three years.
ConocoPhillips (COP) 9/6/17–4/11/18. COP daily price chart. Breakout.

Source: OptionsHouse


But yesterday’s up gap—while admittedly just one day—wasn’t just a move above near-term resistance. The weekly chart below shows it occurred at a conspicuous technical level that has functioned as support and resistance for several years, turning back rising prices from 2011-2013 and supporting declines in 2014-2015.

The stock may have more to do to prove it can sustain its most recent breakout, but there’s currently no major technical targets until the 2015 swing highs around $70 (the upper portion of the 2014-2015 consolidation bounded on the downside by the long-term support-resistance level).

ConocoPhillips made news recently by announcing that it was downsizing its presence in the Permian Basin—the oil reserve that sparked the initial American oil boom in Texas decades ago, and which has been discovered to have, for lack of a better term, a lot more gas left in the tank than previously thought. That decision seemed to run counter to the rest of the industry’s recent rush to get in on the Permian neo-boom. But COP’s move appears to be born from strength: It’s unloading a small portion of tangential Permian holdings and instead expanding on other promising (and lower-cost) opportunities.1

ConocoPhillips (COP) 2/1/10–4/11/18. COP weekly price chart. Support and resistance.

Source: OptionsHouse


Of course, near-term crude prices have to be considered when talking about any oil stock. The other immediate factor with the potential to play into a bullish crude/COP scenario was made evident to early rising traders yesterday, who were treated to the following Tweet from President Trump around 6 a.m. ET: “Russia vows to shoot down any and all missiles fired at Syria. Get ready Russia, because they will be coming, nice and new and “smart!”2  

Syria is not an important oil-producing country, but any armed conflict (or threat of) in the Middle East has a history of pumping up the cost of oil, at least temporarily, because of the potential for supply disruptions. Worries about a confrontation in Syria (which risks a clash with its ally Russia) have arguably been contributing to crude’s strength since oil prices sold off along with the stock market in February.3

Geopolitical tensions can dissolve almost as quickly as they emerge, but right now, this one is still in play and appears to carry a great deal of uncertainty.

 

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1 Forbes. ConocoPhillips' Permian Asset Sale Is Part Of A Well-Received Strategic Plan. 4/4/18.

2 CNN.com. Trump taunts Russia, says US military response coming in Syria. 4/11/18.

3 OilPrice.com. Geopolitical Risk Is On The Rise In Oil Markets. 2/26/18.