A month or so ago, on October 15th, I wrote in these pages that I was taking some profit and selling some oil stocks. Crude futures are around ten percent lower today than when I wrote that, so you might think that that was a good decision. The Energy Sector ETF, XLE, however, is only around two percent lower, so it wasn't quite as smart as it looks on the surface. Still, over the next few trading days, I will be reversing that and buying some of them back in anticipation of a bounce in crude.
That may seem like a strange thing to say given the rumors that have been swirling around of the Biden administration releasing oil reserves to combat high prices and even of requesting a coordinated release by other countries, but that looks pretty much priced in at current levels, and the impact, should it happen, will be short-term in nature.
Biden and other Western leaders are feeling enormous political pressure to "do something" about rising energy prices and releasing reserves is the obvious thing for them to do. It will reduce the political backlash somewhat, but we should remember that for many in Biden's party, relatively low oil supply and the resulting high oil and gas prices are features of his energy policy, not bugs. If there is to be a hastened transition away from fossil fuels it will be aided by high oil prices, so deliberately keeping them low for any extended time is not an option for him politically.
Then there is the news this morning that the Austrian…
A month or so ago, on October 15th, I wrote in these pages that I was taking some profit and selling some oil stocks. Crude futures are around ten percent lower today than when I wrote that, so you might think that that was a good decision. The Energy Sector ETF, XLE, however, is only around two percent lower, so it wasn't quite as smart as it looks on the surface. Still, over the next few trading days, I will be reversing that and buying some of them back in anticipation of a bounce in crude.
That may seem like a strange thing to say given the rumors that have been swirling around of the Biden administration releasing oil reserves to combat high prices and even of requesting a coordinated release by other countries, but that looks pretty much priced in at current levels, and the impact, should it happen, will be short-term in nature.
Biden and other Western leaders are feeling enormous political pressure to "do something" about rising energy prices and releasing reserves is the obvious thing for them to do. It will reduce the political backlash somewhat, but we should remember that for many in Biden's party, relatively low oil supply and the resulting high oil and gas prices are features of his energy policy, not bugs. If there is to be a hastened transition away from fossil fuels it will be aided by high oil prices, so deliberately keeping them low for any extended time is not an option for him politically.
Then there is the news this morning that the Austrian government is putting a nationwide lockdown into effect to combat a surge in Covid-19 cases there and are mandating vaccination for the entire country beginning in February of next year. That has traders refocusing on Covid and its impact on oil demand, just as the possibility of a temporary boost to supply looks likely. Inevitably, that combination has pushed crude lower again this morning but, fundamentally nothing has changed.
Austria is a country of around 9 million people. In terms of global oil demand, reduced consumption there as a result of a lockdown will barely register. The problem would be if other European countries currently experiencing a surge in hospitalizations and deaths, such as Germany and The Netherlands, feel that they can follow suit. The chances of that are greater now than they would have been a few months ago because elections in both countries are over, meaning that politicians can take some short-term criticism for mandates and shutdowns if those things result in long-term benefits. However, while that is enough of a risk to dampen my enthusiasm for long crude futures trades and prompt me to take a slightly more defensive stance in my general stock portfolio for a day or two, it doesn't dissuade me from averaging back into energy stocks.
Neither Germany nor The Netherlands are going to rush to impose restrictions, and there is a good chance that localized regulations and steady increases in the numbers vaccinated in those countries will cause the surge to subside before they do. There will be talk, of course, but a lot of risk is priced into CL after this morning's big drop.
Stock buys are longer-term positions and, when the initial shock of an Austrian shutdown fades and when the anticipated reserve releases have come and gone, the world will be back to a situation where energy and therefore oil demand is in conflict with supply restricted by both OPEC+ policies and regulations and restrictions on the industry in the U.S. and other free-market countries. That makes the risk of buying oil stocks again worth taking.
From a technical perspective, there is also some encouragement for oil bears but, again, that looks like much ado about nothing. They would point to the break of the 50-Day MA (blue line above) as significant, but recent history suggests it is not. CL has broken through that line on nine separate occasions over the last year, and has bounced back each time, so it just doesn't look like a solid support whose breaking has any major significance in this case.
A month ago, some weakness in crude looked likely as political pressure mounted on Joe Biden to do something, or at least look as if he was doing something, to combat high gasoline prices in the U.S. Well, he has been making the anticipated noises, and may even take concrete action, but his long-term attitude to oil is unchanged. So, when he has calmed the criticism, there will most likely be reversion to conditions that push oil prices higher. Despite the negative long-term effects that implies for oil companies, stocks will respond positively to higher oil for a while, so buying over the next couple of weeks looks like a decent play.
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