Oil Meltdown Not Ruling Out Year-End Energy Bounce

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by Tyler Durden
Friday, Dec 08, 2023 - 06:05 PM

By Esha Day, Bloomberg Markets Live reporter and strategist

The slide in oil prices quickened its pace this month, driving crude below the key $70 level on Wednesday. But some strategists say equity investors shouldn’t throw in the towel yet, as a year-end bounce-back for energy stocks is still on the cards.

The dip below the crucial psychological threshold came amid a 26% decline in crude prices from a late-September high. Energy stocks have followed suit, with the S&P 500 Energy Sector Index sinking 13% over the same period. Now strategists and technical analysts say the weakness has set up some corners of the sector for a rebound.

The relative performance of energy-related stocks compared to the broader market hasn’t been broken yet, and the “short-term downtrend remains part of a larger uptrend,” according to an analysis by Fundstrat’s technical strategist Mark Newton, that compared the Invesco S&P 500 Equal Weight Energy ETF (ticker: RSPG) with the Invesco S&P 500 Equal Weight ETF (ticker: RSP).  

“This selloff, which has taken many parts of Energy to oversold levels, should now represent an attractive risk/reward situation to consider Energy heading into year-end,” Newton wrote in a note on Wednesday. A technical oversold signal is typically a bullish indicator, suggesting a reversal may be around the corner.  

The group — which includes shares from Chevron Corp., Exxon Mobil Corp., and ConocoPhillips — has been roiled lately as oil prices plummeted on fears of oversupply, with traders expecting high crude exports from the US and other non-OPEC producers. Though the OPEC last week said it will cut production, the market seems “little convinced” by that, analysts and economists say. The bulk of the energy index’s weakness this year came from declines in Exxon Mobil and Chevron. Exxon has moved into an oversold territory as well, while Chevron is approaching that level.    

And while volatility may rule for a little longer, at least until supply concerns are smoothed out, energy equity investors should look to next week for signs on when the sector might stabilize, given prices are nearing the lows touched in Spring this year, Fundstrat’s Newton said.  

Indeed, Wall Street is closely watching the March-low level of $66.74. If oil price moves below that in coming weeks, that can send some alarm bells ringing.  

Oil is near two “extremely important” support levels currently — its 200-week moving average, and its trend-line from the late-2020 lows — and at the same time has become oversold, noted Matthew Maley, chief market strategist at Miller Tabak + Co. That suggests it should be able to hold this level near-term.

“Of course, there are no guarantees that we’ll see a bounce in the black gold right here, but those making negative bets on the commodity and the energy stocks should be very careful down at these levels,” the strategist added.

Still, headwinds may continue to loom over this group well into 2024, as supply levels will be driving the market. Next year will also be the first in three years in which bullish oil investors will not have a post-Covid re-opening tailwind that can pry open pockets of demand, noted RBC Capital Markets analyst Michael Tran.

Still, RBC still has a “constructive stance” toward energy producers in 2024. “Come what may macro wise, we believe energy producers have achieved enhanced resiliency since the pandemic and remain well equipped to afford shareholder optionality via distributions of all kinds,” the RBC energy and utilities equity team wrote in a note on Thursday.

US producers, specifically, can generate moderate growth in organic production, amid free cash flow yields of around 10%, the analysts said, adding that the highest yields come from Marathon Oil Corp., Northern Oil and Gas Inc., Chord Energy Corp., Callon Petroleum Co., and Diamondback Energy Inc. That’s good news for investors, since “the lion’s share of free cash flow should go toward shareholder returns given debt reduction is mostly complete.”