How Low Will Energy Go?

The energy sector has been under pressure as the price of crude falls dramatically. As a consumer you look at the price of oil dropping more than 6% in a week and you are cheering that gasoline price may fall soon. However, on Wall Street the reaction is different, that is if you own oil stocks or crude oil futures. The chart below for crude shows the dramtic drop, but it is worth noting the support levels for oil prices looking forward. On Monday the test of the $95.50 level may have put in a temporary low. The bounce back intraday to close back above the $97.50 support was a key move technically. The bigger question of course is what does this mean for the stocks in the sector looking forward?

The broad sector chart below shows a downtrend in play since the high in February. The break below support  at $70 and the 200 DMA both were negative in early April. The bounce off $68.25 support coincided with crude rising back near $106 and has since retraced along with the price of crude. The sector is now in negative territory for the year putting it as the biggest laggard in the broad sector indexes. That said, are their opportunities in the sector as a result of the selling? It is worth scanning the stocks which make up the index and looking for some of the better dividend paying stocks at or near support. Connoco-Phillips, Spectra Energy, Chevron, Exxon-Mobil and Williams Brothers are the top dividend stocks to watch in the sector as this plays uut near term.

For those who would like to take advantage of the selling and make money as the stocks decline there is ProShares Short Oil & Gas ETF. This fund allows you to participate in the downside movement of the sector. A look at the chart shows the inverse of  IYE, iShares Oil & Gas ETF. The break of support on IYE is equally a break of resistance on DDG. This is the non-leveraged inverse fund offering the investor the opportunity to participate in the downside swing in energy stocks.

The oil services stocks are similar as they are in an equal downtrend and trading below the 200 DMA. Either IEZ, iShares Oil and Gas Equipment & Services ETF or OIH, HOLDRs Oil Services ETF show the break of near term support. The sub-sector may have another 6-10% of downside risk based on the break below key support levels on Monday. This is one area to avoid in the energy sector short term. However, it is worth watching relative to support. Once the speculation and selling subside there will be equal opportunity to own quality stocks.

Natural gas is another component of the energy sector which has been in a long term downtrend since the 2008 highs. After hitting a low of $1.88 per BTU three weeks ago the price has bounced to $2.30 per BTU. That is giving some hope to natural gas as a commodity and the stocks which participate in the commodity. FCG, First Trust Natural Gas ETF is a good tracking ETF for the stocks. UNG, United States Natural Gas ETF tracks the commodity. Both are worth adding to your watch list for any additional upside as the price of natural gas attempts to rebound.

The energy sector is under pressure from the falling price of crude. However, the need for oil and gasoline is not going away anytime soon, just the temporary view of the demand is impacting prices. Watch the downside to find support, and as the dust settles and clarity is gained, look for the value in both the stocks and the ETFs to add to your portfolio.