Volatility In Energy Stocks

energy stocks

Energy stocks remain in freefall as investors fret about a global recession. This shouldn’t be surprising since momentum went negative on June 8. And the reading took every single S&P 500 into the red with it.

The massive run on energy stocks appears to be ending. Last week, we saw the strongest amount of put buying on the SPDR Energy ETF (XLE) since June 2008.

It just so happens that when put buyers purchased that many puts on the XLE about 14 years ago, this coincided with the peak of West Texas Intermediate crude prices at about $145 per barrel. This fast-and-furious selling will likely continue until oil hits its next support level of $100. If it breaks down even more in the days ahead, the target price for WTI is just $90.

Now, I’ve been very bullish on oil since October 2021. However, things are changing a bit. These are the moments to get out of the way, start following momentum, and wait for a new bottom to form. In addition, the ongoing failure by the White House to accommodate the energy sector with actual policy solutions (the heart of the supply problem and higher prices – NOT price gouging) will drag on the industry.

Typically, I would be selling cash-secured puts and credit spreads at lower prices. But I don’t know how much this market will correct. This is not a matter of support levels or technicals. It’s about what human beings are willing to buy or sell this commodity during a period of unprecedented supply and demand uncertainty.

I’m still very bullish on a handful of names. However now is not when I want to try to time this market. The level of unpredictability is challenging. Cash remains your best friend.

The Long-Term Energy Trend

One of the most shocking revelations of the day is speculation that Russian hackers may have attacked the Freeport LNG facility earlier this month. An explosion at the facility has knocked out its ability to deliver liquefied natural gas (LNG) to Europe. As a result, the facility will be offline until the end of the year.

Various reports in the mainstream press have speculated about a possible attack. However, it will be very difficult to confirm such speculation. Someone will need to step up and fill the gap. The U.S. will be a major supplier of natural gas to Europe and nations like Japan and India in the future. While Cheniere Energy (LNG) has been the biggest breakout exporter of the last decade, others are ready to accelerate export plans.

On Wednesday, Chevron (CVX) announced it would purchase LNG supplies from Cheniere for 15 years. The deal starts in 2027. Chevron also announced plans to buy products from Venture Global, a private LNG manufacturer, as well. These deals don’t require that Chevron take on additional risk or need to develop other facilities. The commitment of significant capital by one of the world’s largest energy companies shows that this is going to be a VERY long-term trend. A company like Chevron doesn’t jump head first into this trade without an effective plan to capitalize for its shareholders.

My Conclusion on Energy Stocks

Oil prices are pulling back and speculators are taking money off the table. Meanwhile, this recent LNG crisis tied to Freeport may offer an excellent buy-the-dip opportunity in a business that is just getting off the ground.

European nations will start burning coal again to address their serious energy shortages. Remember that natural gas utility plants create about 50% fewer carbon emissions than coal-fired plants. We might see Europe – which just declared natural gas to be a “Green” energy source earlier this year – turn to more retrofitted natural gas plants as a solution to its long-term carbon emissions goals and for energy security.

Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.
Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.

Related Articles

August 2022 Perfect Stocks

August 2022 Perfect Stocks

Market momentum is Green. However, it’s worth noting that buying FROZE this morning on concerns around Nancy Pelosi’s arrival in Taiwan was against China’s “permission.”

Read More »
August 2022 Perfect Stocks

August 2022 Perfect Stocks

Market momentum is Green. However, it’s worth noting that buying FROZE this morning on concerns around Nancy Pelosi’s arrival in Taiwan was against China’s “permission.”

Read More »