•     The XLE and OIH recover
•     XOM, CVX, BP, RDS-B, TOT, and PBR make a comeback
•     A new regime in Washington DC will shift oil policy in the US and worldwide
•     It is impossible to pick bottoms and tops
•     The shift to alternative energy will limit gains- The trend is higher, take advantage by selling scale-up

 In past articles, I have argued that traditional energy sector shares had declined to levels that were irrational and offered compelling value. I advocated for buying energy and energy-related shares on a scale-down basis during periods of price weakness.

The price of crude oil fell as demand evaporated earlier this year. Energy stocks had been lagging the rest of the market over the past years, long before COVID-19 caused a dramatic shift in demand. OPEC, Russia, and other producers worldwide substantially cut production. The production quotas are likely to remain in place over the coming months as the second wave of the virus causes infections and hospitalizations to rise. New lockdowns and social distancing will continue in 2021. US output declined with the price of crude oil. 

Meanwhile, with vaccines on the horizon, some optimism has returned to the energy markets. The price of NYMEX crude oil fell below $34 per barrel on November 2. Progress on vaccines lifted the price to the $45.53 per barrel level at the end of last week.  On the most recent rally, the price of energy-related companies has gone along for the bullish ride. For those who held their noses and purchased the leading energy companies as the prices fell in October, it could be an excellent time to consider taking profits on a scale-up basis during the recovery.

The XLE and OIH recover

On Tuesday, November 24, the price of January NYMEX crude oil futures rose to a new high above the August 26 peak of $44.59 per barrel. 

Source: CQG

As the daily chart shows, crude oil was above the $45 per barrel level for the first time since early March 2020. The price rose to a peak of $46.26 last week before settling just below that level on November 27.

Meanwhile, the oil-related stocks have gone along for the ride to the upside in the crude oil market since the price fell to a low at $33.64 at the beginning of November.

Crude oil hit its low most recent on November 2, but the Energy Select SPDR (XLE) and the VanEck Oil Services ETF (OIH) fell to lows on October 29. As of the end of last week, the price of January NYMEX futures was 33.8% higher at a settlement price of $45.53 per barrel since the first trading session of November.  

Source: Barchart

The XLE rallied from a low of $26.98 on October 29 to $38.91 per share at the end of last week, a rise of 44.2%.

Source: Barchart

OIH did even better, exploding from $87.48 to $147.73 per share or 68.9%. The oil services stocks had been the worst performers; during this recovery, when the shares outperformed the oil price and the overall stocks market, oil services led the way on the upside.

XOM, CVX, BP, RDS-B, TOT, and PBR make a comeback

The performance of the leaders of the integrated oil companies was nothing short of spectacular since late October. In a little over one month, share prices made explosive comebacks as sector rotation was a powerful force.

Source: Barchart

Exxon Mobile (XOM) rallied from $31.11 to $40.19 per share or 29.2%. The DJIA removed XOM and replaced it with Salesforce (CRM) in August.  

Source: Barchart

Chevron (CVX), the US integrated oil company with the least debt, rose from $65.16 to $91.31 per share or 40.1%.

  Source: Barchart

British Petroleum (BP) posted a 43.1% gain, moving from $14.74 to $21.10 per share.

Source: Barchart

Royal Dutch Shell (RDS-B) gained 60.4%, moving from $21.79 to $34.96 per share.  

Source: Barchart

Total SE (TOT), the French oil giant, rallied from $28.65 to $45.14 per share or 57.6% since the late October low.  

Source: Barchart

Petrobras, the Brazilian oil company, rose from $6.15 to $9.94 per share or 61.6% over the period.

Sector rotation was a powerful force for the shares of the leading oil companies of the world.

A new regime in Washington DC will shift oil policy in the US and worldwide

In March 2020, US daily oil production reached a record 13.1 million barrels per day. The November 3 US election results could mean that the record will stand for a long time.

We are likely to see increased regulation, less fracking, and a move towards a far greener energy policy in the United States under the Biden administration. The President-elect has already committed to rejoining the Paris Climate Accords. While he will not end fracking, regulations will be a lot stricter under his administration than under President Trump’s.

Meanwhile, less output in the US is likely to pass more pricing influence to OPEC, Russia, and other world producers in the coronavirus’s aftermath. OPEC will meet this week, on November 30, to discuss the current production quotas. With the number of infections rising in the US and Europe, OPEC+ will likely extend the 7.7 mbpd cuts into 2021. However, the greener approach to energy in the US is likely to strengthen the cartel’s hand for pricing over the coming years. China, India, and other nations, including the US, continue to consume fossil fuels. A decline in US production in the coming years could lead to much higher oil prices. Moreover, a falling dollar, central bank liquidity, and government stimulus are highly inflationary, which could continue to boost the prices of crude oil and other commodities.

It is impossible to pick bottoms and tops

Picking bottoms and tops in an asset is a fool’s game. Buying at the bottom or selling at the top has a lot more to do with luck than skill.

Over the past weeks and months, I had suggested a scaled-down approach to buying the leading integrated oil companies and oil services companies as the shares plunged. The top companies continued to pay dividends and offered compelling value as they declined.

The recent rally has caused me to shift my strategy. I now favor profit-taking on a scale-up basis. I have no idea where the highs will be, but my average purchases are now well below the current price levels.

In markets, bulls make money, bears make money, but pigs go to the slaughterhouse. The cardinal sin in the markets is to call the direction correctly and lose money. The recovery in oil and oil-services stocks is a chance to cash in on the contrarian trades or investments over the past months.

The shift to alternative energy will limit gains- The trend is higher, take advantage by selling scale-up

The trend in the energy sector of the stock market is now higher. However, the new US administration and the rest of the world is likely to make a serious commitment to climate change. Alternative energy companies are likely to take the leadership role over the coming years. In the short-term, we could see crude oil prices move a lot higher, supporting earnings. However, those integrated oil companies that do not shift their strategies towards renewable and clean energy will be left behind.

Taking profits is always the goal in markets. Building your nest egg for the future is critical. Many market participants fear taking profits because they become greedy and do not want to miss even more upside in a stock or asset. Fear and greed are human emotions that get in the way of sound, logical, and rational business decisions.

Enjoy the holiday season as best you can during this brutal pandemic that has changed the way we live. If you bought shares in energy companies over the past months when they looked like the leaders were on the verge of bankruptcy, now is a perfect time to start ringing the register and booking profits as they could evaporate in the blink of an eye.

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USO shares rose $0.09 (+0.29%) in premarket trading Monday. Year-to-date, USO has declined -69.52%, versus a 14.35% rise in the benchmark S&P 500 index during the same period.

About the Author: Andrew Hecht

Andy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles. More...

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