Worries Grow over OPEC’s Output Cut

As recently as 10 years ago, a $4 drop in the price of crude oil prior to an OPEC meeting and worries over the cartel lacking any consensus would be a huge positive for the stock and bond markets.

Not so much anymore.

OPEC seems broken, fossil fuels are on the decline, and clean energy and fracking has broken the grip of crude oil on the US economy, but recent comments by President-elect Trump could provide some relief for the sector.

Energy has been the best performing sector in the SP 500 year-to-date (that could be a surprise to many), overtaking the safety and dividend trades that drove utilities and staples for the first 6 months of 2016.

Here is the quick take on crude oil and the Energy complex today:

  • 1.) Fundamentals: the OPEC announcement could greatly influence price action for the rest of ’16, but crude has stabilized in the $40’s.
  • 2.) Technicals: Crude oil remaining above $39 – $40 is still significantly higher than last year’s drop from $50 in early November ’15 to $28 – $29 by mid to late January ’16.
  • 3.) Sentiment – has turned sharply negative. Almost no one expects a production agreement out of Vienna.

The Energy sector has been written about here, here and here.

The seemingly overwhelming negative sentiment in Energy today, based on what many THINK we’ll hear out of OPEC tonight or tomorrow, means I’ll maintain the Energy overweight.

Our position is more earnings-based over the next 2 -3 quarters than anything else (crude oil prices).

Energy sector profits were wiped out entirely in Q1 ’16.

Client accounts have an 8% – 10% Energy weight in accounts, with Energy having a 7% market cap weight within the SP 500. Positions are XLE, IYE, and the OIH.

The fact that the “experts” think that nothing positive will come out of Vienna has me still leaning positive for crude oil prices.

We’ll see in the next 24 hours. I could be very wrong and crude could head back to $39.

(Positions can change at any time.)

 

 

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