Massive Activity Across the Energy Space Following Drone Attacks

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Monster Activity Across the Energy Space Following Drone Attacks

Trading volumes surged across the energy space yesterday after a drone attack clobbered the heart of Saudi Arabia’s oil industry.

Crude oil futures (@CL) traded more than 1.3 million contracts, the busiest session in at least a decade. Several other securities tracking the industry also saw huge options volumes, especially some key exchange-traded funds:

  • SDPR S&P Oil & Gas ETF (XOP) traded more than 738,000 contracts on the day — a new record. XOP mostly holds smaller energy companies, especially refiners.
  • U.S. Oil Fund (USO) had more than 675,000 calls and puts, the most in nine months. USO tracks the price of crude oil rather than companies.
  • BP (BP): The British oil giant was the most active single name, with almost 263,000 contracts changing hands.

Want another interesting factoid? The 12 top performing members in the entire S&P 500 yesterday were all energy stocks. In fact, 17 of the top 20 were in the sector.

RadarScreen® with Monday's biggest movers in the S&P 500.
RadarScreen® with Monday’s biggest movers in the S&P 500.

Numbers like that may not be much of a surprise given the geopolitical events. However they stand out because oil was already showing signs of turning higher. And, investors were already starting to shift into the sector.

What May Come Next

This change could be important because the market’s had such a heavy focus on growth stocks and technology for a long time. A rotation toward energy could bring entirely new names into focus — including many that were forgotten.

Oil drillers are the most obvious. Exxon Mobil’s (XOM) the biggest name by far, but traders seem to prefer several other companies. Many of them are highly leveraged.

Apache (APA), for example, led the S&P 500 with a 17 percent gain. Its debt load of $8 billion was almost equal to its market cap. That’s bad news when oil prices fall because its assets are worth less while its liabilities remain the same. But the exact opposite thing happens to the upside, creating opportunities for bargains.

Airlines are another big sector to watch when oil spikes, although they generally move lower. The S&P’s biggest decliner yesterday, for example, was American Airlines (AAL). This industry’s sensitive for two reasons. Not only do higher fuel costs squeeze its margins. Carriers may also faces terrorism risks if tensions in the Middle East escalate. Will the bears keep piling on?

 SDPR S&P Oil & Gas ETF (XOP) with select indicators.
SDPR S&P Oil & Gas ETF (XOP) with select indicators.

Defense contractors, on the other hand, rallied on the prospect of instability. L3Harris (LHX) led the charge with a 3 percent gain.

No More Inverted Yield Curve?

Energy also has a less direct impact on bonds and financials. While the geopolitical risks increase demand for bonds in the short term, higher oil prices also raise inflation. That, over the longer term, makes bonds less attractive.

Downward pressure on bond prices would lift their yields. That could increase demand for banks and financials that have been squeezed by the flat yield curve.

Higher energy prices also have the potential to boost domestic manufacturing. We’ve actually seen this before — especially if you track “Fabricated metal products” in the Labor Department’s monthly jobs report. Remember the U.S. is now the world’s biggest oil producer, and that requires plenty of heavy equipment.

In conclusion, the market’s heavily focused on tech stocks like Apple (AAPL) and Facebook (FB) for several years. That’s especially true for TradeStation clients. But September’s seems to feature a shift toward other parts of the market. The current situation in oil may only increase the trend. Is it time to start relearning some forgotten names?

TradeStation Hot Lists showing most active underliers on Monday. Notice XOP, USO and BP on the list.
TradeStation Hot Lists showing most active underliers yesterday. Notice XOP, USO and BP on the list.
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