Morning Comment: Bullish "Game Changer" for Energy Stocks

  • Many see the bounce in oil will be short-lived.
  • However, the "risk premium" HAS to be raise for crude.
  • This should put a floor under crude.
  • This, in turn, should give investors confidence in the group.
  • A group that is under-owned & trading at a discount to crude.
  • Buy energy stocks on any weakness.

A sudden switch to complacency in the broad stock market

The stock market saw a muted response to the developments in the Middle East…as it seems that investors believe that the “Fed put” is alive and well (and “in the money”) and that we’ll get some sort of interim deal with China in October. However, investors also understand that the global oil market has changed in the last decade, so they’re banking on the thought the disruption in supply out of Saudi Arabia will not have the same kind of impact it would have had a decade ago.

We certainly understand this thinking…as there is no question that the oil markets have seen a huge change over the last decade. However, there are still differences of opinion when it comes to the intermediate and long-term impact that the attacks of last weekend will have on the oil markets.

Some people believe the bounce in crude will be short-lived.

There are some that say that this is just a blip on the radar screen…and that oil prices will pull-back before long…because there is still plenty of supply around the world…and demand remains suspect. Therefore, they say, even though the Saudis (backed by the U.S.) will probably respond to the attack in a military fashion, things will settle down before long (as long as the “response” is not a drastic one). In other words, these people believe that as long as there is not a substantial escalation of this situation, crude oil will fall back down to where it was trading before the attacks.

The attacks in Saudi Arabia raise the risk premium for the price of oil.

However, we agree with those who believe last weekend’s attacks are a game-changer for the oil market. No, it does not mean that crude oil is going to rocket towards $100. However, the world just learned that almost any oil facility in the world is now vulnerable to attacks at ANY time!!!!!!! So any excess capacity that exists in the world today can disappear at a moment’s notice. Therefore, the “risk premium” for the price of crude oil HAS to go up in our opinion. Thus even if the “response” by the Saudis/U.S. is a muted one, the floor below the oil market should now be at a higher price than it was just a week ago.

In our opinion, this should mean give investors more confidence to buy energy equities. The group is under-owned and has been lagging behind the price of crude oil all year. However, investors have been worrying that the weakening global economy could take oil prices lower. This fear was especially high given that more signs of an upcoming recession were begin to develop in recent months (like the inverted yield curve). However, we now have oil prices rallying…AND we also now have a reason to think that the downside for crude is more limited going forwards…because the “risk premium” in crude oil has suddenly moved higher. This is bullish for crude oil AND for energy equities.

WTI has broken above a "symmetrical triangle" pattern.

As we said above, this does not mean that crude oil is going to skyrocket higher…and energy equities are going rally in a straight line from here. In fact, after such an incredibly sharp rally yesterday, we wouldn’t be surprised at all if they pulled-back over very-near-term. However, we’d also note that yesterday’s rally in WTI took the black gold above the “symmetrical triangle” pattern we have been highlighting in recent weeks. As WTI settles down to digest those huge gains from yesterday, it will be interesting to see if it falls back below the top line of that pattern. If it does not…and instead pops again after a short period of consolidation, it’s going to give WTI the green light on a technical basis. (See chart below.)

So the under-owned & undervalued energy stocks look very attractive.

Therefore, although we don’t think investors should chase the energy equities up at these levels (after such a big one-day rally), we do believe that the odds are VERY high that we’re entering an extended period of time where energy equities do very, very well…and outperform. Again, the energy sector is VERY under-owned…it is trading at a discount to its underlying commodity…and this commodity now has a floor beneath it that is much higher than it was just a few days ago!!! In our minds, this is a GREAT combination…and it should lead investors to look to add to energy equities in a significant way going forward. In other words, investors should look to add to their exposure to energy stocks on any weakness…but they should not wait for deep pull-back in the group. We don’t think that kind of pull-back is coming.

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Matthew J. Maley

Managing Director

Chief Market Strategist

Miller Tabak + Co., LLC

Founder The Maley Report

275 Grove St. Suite 2-400

Newton, MA 02466


Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.

Posted to The Maley Report on Sep 17, 2019 — 8:09 AM
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