One Bearish Story After Another Seems to Be Hitting Crude Oil

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One Bearish Story After Another Seems to Be Hitting Crude Oil

Energy may be resuming its downtrend as one bearish story after another piles up.

Crude oil futures (@CL) are down for the third straight week. That’s the longest losing streak since they last peaked in May. The chart has also dropped below both its 50- and 200-day moving averages in the last two sessions.

“I see an abundance of energy supply in terms of oil and gas,” Fatih Birol of the International Energy Agency told Reuters yesterday. Goldman Sachs added that the coronavirus spreading in China will hurt air travel. That, in turn, could reduce demand for jet fuel and shave another $3 off crude oil.

The news comes at a time when potentially bullish catalysts are fading. Recent tensions with Iran failed to escalate and the U.S.-China trade deal has now passed. Meanwhile, domestic production keeps hitting record levels as a glut of unsold inventory builds.

Crude oil futures (@CL), with 50- and 200-day moving averages.
Crude oil futures (@CL) chart, with 50- and 200-day moving averages.

Are Investors Going Green?

Interestingly, the weakness in fossil fuels comes as investors embrace green-energy alternatives like electric cars and solar. Here are some names that have rallied as traditional oil-and-gas companies struggled:

  • Tesla (TSLA): Elon Musk’s electric car maker more than doubled in the last four months after fixing its production issues. It’s expanding into key markets like Germany and China. TSLA just passed $100 billion of market capitalization today, likely putting it on track for inclusion in the S&P 500.
  • Nio (NIO): A smaller Chinese version of TSLA that had a surge of orders in December.
  • Enphase Energy (ENPH): A provider of technology to manage home solar systems, storing power overnight and tracking wattage. ENPH is up more than 1,000 percent in the last two years.
  • SolarEdge (SEDG): Similar to ENPH, the provider of solar infrastructure has almost tripled in the last year.

Know Your Options

Some large energy companies experience heavy options volume every day. That creates potential opportunities for traders thinking that the bigger downtrend may continue:

  • SPDR S&P Oil & Gas Exploration ETF (XOP): This highly volatile fund is the busiest underlier in the group, averaging more than 110,000 contracts per session. It holds more speculative drilling companies.
  • U.S. Oil Fund (USO): This fund directly tracks crude-oil prices, not oil companies. It turns over about 70,000 contracts daily.
  • SPDR Energy Sector Fund (XLE): This diversified ETF is less volatile than XOP because it holds large companies. It trades about 64,000 options per session.
  • Exxon Mobil (XOM): The biggest U.S. energy company averages nearly 50,000 contracts each day.

Remember, more options volume tends to result in better pricing for traders. That’s because underliers with a lot of liquidity have tight bid/ask spreads.

Finally, drops in energy have occasionally weighed on the broader market. This results from low oil prices depressing interest rates, inflation and growth expectations. With the S&P 500 going almost straight up since late October, lots of investors have been waiting for a pullback. Could we finally get one, thanks to black gold?

Exxon Mobile chart (XOM), with 50- and 200-day moving averages.
Exxon Mobile (XOM) chart, with 50- and 200-day moving averages.
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