Displaying items by tag: energy
Elizabeth Warren’s ascendency to being the leading candidate for the Democratic presidential bid, coupled with her strongly leftist policies, has begun spooking various sectors. Energy is ground zero. The reason why is a tweet recently fired off by Warren: “On my first day as president, I will sign an executive order that puts a total moratorium on all new fossil fuel leases for drilling offshore and on public lands … And I will ban fracking—everywhere”. If that eventuality happened, it would greatly wound the US oil industry. Entire oilfield services industries would cease to exist in the US, and Canadian shale would be the big winner, along with huge oil companies, where the price gains from the tightened supply would offset other losses.
FINSUM: Analysts estimate this would send oil prices up around 60%, but it would really hurt the US oil industry.
Oil took a phenomenal turn lower this week as news came out that half of Saudi Arabia’s oil production had been taken out via drone strikes. Yemeni’s took credit, but many suspect it actually came at the hands of Iran. Oil moved in a big way, up 20% at one point, representing the biggest percentage move in three decades. The drone strike is hugely consequential, as it removed 5% of the world’s daily oil supply. Airlines stocks were hit badly on the news, and Amazon may be the next big victim as higher oil prices mean higher shipping costs.
FINSUM: This big change is going to filter through markets in different ways, but the threat to Amazon seems real and very meaningful.
The inverted yield curve has investors feeling down on their luck at the moment. What is the best way to play the turmoil and volatility? The answer may be in two seemingly unlikely places. The first is in energy ETFs, especially oil. Energy stocks have traditionally done very well during inverted yield curves, so an ETF like XLE seems like a good bet right now. Additionally, tech ETFs such as Vanguard’s VGT could be a good play, according to Bloomberg. Tech has often done well during inversions in the past.
FINSUM: Recommending a tech ETF right now is the height of contrarianism. Tech is basically caught in the middle of the trade war, and frankly, seems like a bad buy.
All the signs seem to point to commodity prices headed lower. Why you may ask? Pretty simple—the economy looks to be weakening, so demand will be lower at a time when supply will stay high. But no so fast, says Evercore, who argues that oil prices may be in for a counterintuitive rise of at least 19% by the end of the year. Evercore contends that production will be flat this year, as OPEC is curtailing output. At the same time, global monetary policy easing is likely to sustain demand, meaning the basic picture for oil may be more bullish.
FINSUM: We think this is an optimistic view that does not take full account of the worsening economic outlook.
Oil prices are going to get some support as OPEC is planning to cut its output. That won’t be welcome news to those at the pump this summer, but it is good for the oil industry. Within the cuts, there will be winners and losers. One big worry is that the cuts won’t even work because there is still too much production from the US and because the primary fears are on the demand side, not the production side. The key is to buy oil stocks that can thrive in a low price environment and deliver improving returns to investors. These include EOG Resources, Suncor, Pioneer Natural Resources, NRG Energy, and Delek.
FINSUM: Oil stocks are deeply out of favor right now, so this is quite a contrarian call, but given the catalyst of OPEC cut they may be a solid bet.