Oil Speculation Driving Energy Prices Higher

The news concerning the conflict between Iran and Israel is in the headlines almost daily. The reality of war or outbreak is given a low probability currently, but that doesn’t or hasn’t stopped the speculation in oil prices. The price of crude has slowly pushed back near the top end of the current trading range at $102.35. A look at he chart below shows the range clearly defined and a move above the $103.40 level would be a clear breakout from the current range.

The key point is to understand this all speculation driven over a potential disruption in production in Iran should the dispute escalate. If we look at the demand side of oil it is not rising in the US. It is up modestly in China and around the globe. Thus, we have a dilemma as an investor. The fundamental data does not support the move in crude short term. This is where you have to make a decision as an investor. Do I follow the technical data on the charts and accept the risk of the trade from a pure technical perspective? If so, plan the trade and trade the plan. Be disciplined with your entry point, escape or stop, and your target. Predefine the trade and potential outcome and then execute the trade.

Returning to the sector overall, it is important to look at the impact on the stocks relative to what is happening to the price of crude. The chart below is XLE, SPDR Select Energy ETF. The trend is established off the low in October. The test in November and December of the trend is the clearer trendline for the sector short term. The accelerated trendline over the last seven weeks is clear. The break above $72.90 resistance is positive. $77.60 is the near term target and the exit point (short term) is a retreat below the breakout point at $72.90. The large cap stocks have been slow to react to the speculation in oil prices and the fundamental data (earnings) have not been impressive in the fourth quarter data. Thus, this has set up as a technical trade as well with the fundamental data not confirming the move higher. Doen’t preclude the fact there was money made on the technical data which is why both should be part of the investment/trading process.

Oil services stocks have not been as quick to join the upside movement from the rise in crude prices. That is not surprising when the view is speculation is driving prices. There has been a solid uptrend line off the December low offering some upside for investors. The current outlook is the longer term consolidation pattern in place off the October low. If the sector can break above the topside resistance at the $44.25 level there could be further upside opportunity in the sector. This is definitely one to keep on your trade watch list near term. Fundamentally the stocks are mixed in the sector relative to earnings, thus the chart. Again, the key is to manage the trade process, define the entry, exit and target prior to taking the trade and manage the risk.

Oil and gas exploration and production is another sector to watch relative to energy. IEO, iShares DJ US Oil & Gas Exploration & Production, is another chart worth our attention. The uptrend remain in play off the October bottom and is accelerating over the last two weeks. The break through $67.40 resistance is positive and there is room to run to the target of $75.40. The refiners and drillers fall into this category and they have been moving on the rise in crude prices. Thus, there is speculation being priced into the stocks, but the run has been solid and the fundamentals in this sector are improving overall. Thus, the combination is setting up a stronger move to the upside for the sector. Manage the risk of the position is key. Define entry, stop and target. So far it is playing out according to plan, but you still have to manage the ongoing risk of the trade. 

Energy is moving overall, but there is geopolitical risk present in the move and that risk has to be managed aggressively in any positions.