CEA Monthly Issue – February 2015
Commodity Outlook: Oil
No doubt about it, this was a wild week in the energy markets. The price of West Texas Intermediate (WTI) crude exploded higher in early week trading. At one point, the commodity had advanced over 20% off the multi-year low set on January 29th.
See for yourself…
After a long, arduous downtrend the past few months, crude turned on a dime and rallied.
What caused the sudden reversal to higher ground?
Investors are starting to realize that long-term fundamentals are finally shifting in favor of the bulls. First of all, oil companies the world over are announcing dramatic capital expenditure reductions for 2015.
Just this week, BP Amoco PLC (BP) announced this year’s exploration budget will be around $4 billion lower than previously thought. BP’s news came after Royal Dutch Shell (RDSA) revealed they will cut spending by $15 billion over the next three years.
Folks, the entire oil industry is responding to the severe oil downturn with drastic spending cuts. Thousands of jobs are being lost as drilling activity slows.
Speaking of drilling activity…
The Baker Hughes’ (BHI) US drill rig count is falling off a cliff. In fact, 94 oil rigs went dormant last week alone as companies pull in the reins on exploration. That’s the largest one-week drop in oil directed drilling rigs since BHI started tracking of the data in 1987!
Does all this information mean it’s finally time to go long crude?
Not yet…
Short-term oversupply issues will likely provide resistance to higher oil prices for at least the next few months. According to various sources, the global crude market is oversupplied by around 1.5 million barrels a day.
As a result, the best-case scenario for oil is that it trades in the low- to mid- $50 range for some time to come.
But here’s the deal…
Now that investors are getting an idea of where crude’s ultimate price bottom is, they’re starting to nibble on heavily oversold oil producers.
Names like Conoco Phillips (COP), Chevron (CVX), EOG Resources (EOG), Occidental Petroleum (OXY), and Exxon Mobil (XOM) are up anywhere from 4 to 8% over the past week.
The rally in oil names makes perfect sense. After all, if you know the price of oil is destined to return to higher prices, why wouldn’t you buy the companies producing it at their cheapest valuations in years?
Folks, that’s precisely what we’re going to do this month…
We’re buying into the Energy Select Sector SPDR (XLE). The ETF holds all the oil names mentioned above and many more.
I’ll provide more information about the opportunity in oil stock in our update later this month.
For now, just focus on buying XLE at any price under $80.25 a share!
Technically Speaking:
As you can see, XLE is rebounding off the recent 52-week lows at $72.50. While we’ll undoubtedly see short-term volatility in XLE as oil fluctuates, this widely held energy ETF will likely trade higher as 2015 progresses.
Keep in mind, XLE only holds best of breed oil producers. You won’t find any risky exploration stocks on the verge of bankruptcy here!
WHAT TO DO NOW:
Energy Select Sector SPDR (XLE) is trading at $79.72
Buy XLE up to $80.25 per share
Our profit target is $95.00 or more
Risk Control Price is $71.75 (or a 10% stop loss from your entry point)
Category: Commodity Trading
