Sometimes it pays to be at your desk when others are sleeping off the previous day’s holiday food and festivities. As was the case this past Friday, it was the perfect occasion for news to drop which would compel a panicky reaction in post-holiday illiquid markets. There are no coincidences on Wall Street, and things happen for a reason; timing is everything. As all know there have been several variants of SARS CoV-2 (COVID-19) and we can anticipate more to come. Whether this current variant, Omicron, will be more dangerous is the question. It has spooked enough health officials that several countries have initiated not only travel restrictions but lockdowns once again. As we write on Tuesday, the jury is still out on this new variant, which brings uncertainty to the investment decision process, and uncertainty will generally lead to lower prices as portfolio managers keep their wallets on the hip so to say.
Pandemic trades have once again captured interest, with energy markets getting crushed, and the energy service stocks coming under selling pressure as well. Underneath the surface, energy company shares have fared better than the price of oil and natural gas. It may be that the industry is more rational, less leveraged, and more disciplined. Or that federal leases are becoming more expensive. Also, money center bank lending to the industry has been restricted due to federal government/ environmental pressure on the banks, holding back business activity and potential supply. So much so, that several oil & gas producing states have come together and threatened the bulge bracket banking organizations with boycotts related to the state pension monies run by the investment management arms of the banks (reported to be about 600 billion dollars). At a 20 basis points management fee, that is 1.2 billion dollars per year in fees to the banks. Not exactly chump change.
Back on October 21st, our blog focused on the energy sector. In the last paragraph of the note, we observed the following:
‘It appears that the bullishness has returned in a big way. As an astute friend pointed out recently: “The Bullish Percent Index for the S&P energy stocks remains at 100%. The % of S&P energy stocks above their 50 day moving average is also at 100%. It doesn’t get any better than this.” So we keep an eye on the commodity and the sector ETF, trim long positions that are extended and keep stops under the rest.’
Having done so, one would have avoided considerable loss of the gains made in the sector since the pandemic panic lows of March and October of 2020.
So where do we stand now? The pendulum of sentiment has swung once more to the downside from where it stood in October. Since then, WTI crude oil has moved from the mid-80s in price to the mid-60s, with a good portion of that drop in just the last few days of panicky selling. The front-month contract is below the 200-day moving average for three days in a row and is technically oversold on several measures.
Given better news on Omicron and the recent history of lockdowns becoming less prevalent with each new variant, with a rally back above the 200 day, and a trendline break to the upside that sticks, a reasonable 50% retracement of the move down would give a potential upside target of $75 for WTI. That would also be supportive of the shares of the oil & gas producers and refiners. Let’s see what happens.
Stay safe and trade well.
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