A Long-Term Trade As Oil Markets Recover

If, like me, you like to trade energy-related products, whether futures, stocks, options, or whatever, the last two months or so have been boring or, more positively I guess, peaceful. Part of the joy of markets in general and of energy, in particular, is that there’s always something moving, so I’ve done well on things like fuel cells on the way up and then down and a few intraday momentum trades in natural gas, but when oil isn’t moving, most energy stocks get stuck too.

As you can see from the chart below, WTI has been stuck in a narrowing channel with a very gradual upward trend for two solid months…

After all the drama of the collapse and the front end contract going negative back in April and then the rapid bounce back, a period of calm could be anticipated at some point, and it makes sense now given the delicate balance between supply and demand factors.

Supply has been contracting as the OPEC+ group held steady with their output cuts (until the July meeting at least) and the collapse in oil forced massive rig shutdowns outside that group, particularly in the U.S. That is a bullish influence on oil, but it has been offset by one of the sharpest, deepest recessions in human history, the impact of a resurgent Covid-19 in the U.S. and recently by the relaxation of the cuts by OPEC et al.

Recently, though, the focus of the market has been on the demand side of the equation. That is why crude has been essentially following the S&P 500 for a few months…

There are some differences of course. Crude has flattened out faster, while yesterday, for example, as the S&P ground higher to challenge the all-time high, CL, the main WTI futures contract, was falling. Still, the overall trend in both cases is still intact and if crude continues to follow stocks there is no reason to believe that we can’t keep grinding higher for a while.

The wild card here though is that increase in quotas agreed by OPEC+ and the resulting resumption of exports by several signatories to that agreement. As that oil hits the global market it will offset any improvement in the short-term demand picture from vaccine news or whatever.

To me, all of this suggests one trade.

If oil can stay steady or maybe grind slowly higher while overseas production is increasing, the logical place to be is in a multinational oil company with a lot of overseas exposure.

I am sure a lot of readers will be thinking “Here we go again! Another oil guy saying buy big oil, even though the stocks have been terrible for years…”, but it is a matter of timing. Back in March, I suggested Royal Dutch Shell (RDS/A) in these pages when it was trading in the $20s, just before it jumped to around $40. It has stagnated since, but the point is that there are sometimes short-term opportunities in the normally stable big oil stocks, even when movement is sporadic.

That is what we are likely to see in the coming weeks from Total S.A. (TOT).

Total is a France-based, multinational, integrated oil company with limited exposure to the U.S. market but a strong presence in other countries, most notably Russia. That makes it an ideal candidate for a trade based on price stability or even increases, continued declines or stagnation of U.S. output, and increasing production in OPEC+ countries.

Keep in mind that this is a trade based on changes to fundamentals that will take place over time. It is not something that will necessarily offer quick profits, but it looks likely to reward patient traders and investors over the next few weeks or months. On that basis, though, it certainly looks worth a try.