How To Participate in a Rebound in Oil

Source: Michael Ballanger 10/01/2024

Michael Ballanger of GGM Advisory Inc. shares his thoughts on the current state of the market and one energy stock he recommends as a long-term Buy.

The USD index futures are up .031% today with 10-yr. (-1.59%) and 30-yr. (-1.61%) yields declining in response to the U.S. dockworkers’ strike.

December gold (+0.47%), silver (+0.50%), and copper (+0.35%) are higher, while oil is down (-0.85%). Stocks are mixed with the DJIA off 0.25%, the S&P 500 down 0.10%, and the NASDAQ up 0.05%. Risk barometer Bitcoin is down 0.14% to $63,862.

Energy

Oil prices have been in a downtrend since the Russian invasion of Ukraine in March 2022, when they spiked to over $130/bbl. They are now down over 46% to $67.75/bbl and down again this morning (- $.37/bbl) as the American dockworkers’ strike is seen by futures traders as dampening demand.

With the 52-week low at $65.17/bbl, I think that there is currently zero “war premium” in oil prices these days, which means the fear of a disruption in oil supplies is non-existent, and that is sorely misguided.

Now, the hedge against a catastrophic outcome to either the war in Ukraine or the Middle East is also gold, and I am more than adequately positioned there, but gold has had an amazing run since the lows in February, so the elasticity of upside potential is minimal based upon a tail- event like an oil shock.

The best method of participating in a rebound in oil is through the producers who are trading as cheaply in terms of price/earnings, price/book, and price/cash- flow as any U.S.-based group of stocks in decades.

The ETF that covers the big multinational oil andHow To Participate in a Rebound in Oil gas producers is the Energy Select Sector SPDR Fund (XLE:NYSEARC) that has traded as low as $78.98 last January and at $82.34 a couple of weeks ago.

As can be seen from the chart, there have been three major “buy signals” since the lows of last month, with MACD, MFI, and now TRIX all kicking into gear. Accordingly, I want to take advantage of today’s pullback and take a starting position in the XLE.

I have traded this ETF before, and when it moves, it moves fast with big gaps in price, and while it is not always easy to nail down the exact lows, sentiment numbers and trader positioning are about as dismal as one can get for any specific sector.

In the GGMA Trading Account:

• Buy 50% position (1,000 shares) at $87.00 (no stop)

I am running nearly a $400,000 cash position (46%) in this account, so I intend to allocate half to the energy trade.

For those subscribers in need of a great little Canadian junior that pays a 5.32% dividend yield (CA$0.10/share), I really like Hemisphere Energy Corp. (HME:TSX.V), which continues to grow earnings and free cash flow every quarter and unlike the rest of the sector is trading a shade below its 52-week high.

• Buy 50% position HME:TSXV (25,000 shares) at a $1.90 limit. (no stop)

This one will be a long-term buy on the basis of yield alone.

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Important Disclosures:

1. Michael Ballanger: I , or members of my immediate household or family, own securities of: All. I determined which companies would be included in this article based on my research and understanding of the sector.
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