🗞 Oil Money

WHILE YOU POUR THE JOE… ☕️
Run it Up

I don’t know where these numbers are coming from. However, people still have money to spend on retail, even as groceries and rents are higher than Snoop Dogg on a Tuesday evening.

Nonetheless, people are spending well into their savings and racking up more credit card debt while at it. The thing is, some stocks in the consumer sector didn’t react well to this news.

One of them was Williams-Sonoma, a stock on which we currently have a short thesis and position. We posted all about it here.

Speaking of contradictory plays, let’s get on with today’s email 📧…

COMMODITY ROYALE
Oil is Your Friend

Yeah but not really, most energy investors have either given up on the game, or lost enough hair to call it a year. 📉 

Oil prices have disconnected from most economic realities today, but it makes sense for oil to remain below $80, at least for now.

The price of black liquid gold moves because of three factors: supply and demand, of course, and the weight future sentiment plays into the price of this commodity.

Let’s break these down one by one yeah?:

Supply

Before we discuss crude stocks in the United States, let’s examine the petroleum industry’s capacity utilization rate.

Currently running at a rate of up to 91.5% compared to 88.3% back in April of this year, I think the oil supply is getting a bit tight, considering the high rate of utilization.

Oil dropped from roughly $90 a barrel to below $70 a barrel during the months of low utilization, so the turnaround might be imminent now that this measure is back on hotter territory.

It looks like the supply is also slowly tightening 📉, except for September and October, when the U.S. suddenly decided to import nearly 2% more to the national oil stocks.

Wouldn’t be too far from reality to assume these injections were to keep gas prices lower ahead of the election.. Still:

It looks like the overall trend for oil inventories is down for the year and down for the quarter. Fundamentally, this should be bullish for oil. Yet, the price remains on the lower end of the spectrum despite utilization being above 91%. 🔥 

That begs the question of whether the lower prices are actually due to weak demand in this case. I mean, what else could it be, right?

Demand

This is the commitment of Traders (CoT) report for oil, showing the convergence and divergence between dealers (red) and non-dealer institutional buyers (green).

You can see how when dealers start to increase their oil futures inventory, as they are today, oil prices typically rally shortly thereafter. The same can be said when oil futures inventories are on the lower end for non-dealer entities.

That would make fundamental sense in this case. Based on everything we’ve seen on the supply side, dealers are now spiking more demand for oil.

Here’s another push on the demand side for oil. Manufacturing PMI indexes for the three major economies in the world (US, China, Japan) have been expanding for the most part, creating a tailwind for oil:

After recent stimulus in China’s economy, the expansionary impacts have spread to Japan, pushing both of these manufacturing PMIs higher. 📈 

The US, on the other hand, has fallen behind with a 23 consecutive month contraction in manufacturing… sad.

Sentiment

Here’s where we get a bit more complex, but bear with me because this is key for you to know.

The Value-focused ETF $IVE, when spread against the Growth-focused ETF $IVW, gives out a pretty reliable signal as to whether oil will make a move higher or lower.

Why?

Value stocks are considered defensive stocks and the like, while growth stocks are mostly technology stocks. Knowing that technology and energy are typically negatively correlated helps you understand that a rotation in/out of growth can help/hurt oil prices. 👀 

So, where are we today?

It looks like Value is leading the way, but not for long. The spread against growth is significantly deviating, so we can call for a rotation the other way pretty soon.

As you can see in the previous chart, oil prices (purple line) typically move in the opposite direction from this spread.

So think, spread down = oil up. 🎯 

You can track this spread in ThinkorSwim, for example, by charting:

IVE-1.5866048599276983*IVW

Anyway, that’s all I got on oil for now, see you at $100 a barrel. 🫰 

TRADE OF THE WEEK
Runnin’ With The Devil

Knowing that a few fundamental tailwinds are pushing the potential oil price higher for the coming quarters, we decided to investigate the sector further to find out which specific space made sense to consider a buy.

Turns out, it was pretty tight between the mechanical equipment industry and the refining and marketing industry. Then there’s the exploration and production US side of the business looking to grow at 190% 🔥 along with the drilling industry set at 139% as well.

The lower forward P/Es in these spaces are a concern, but we still warrant a look into them.

Now, we need to move on to individual stock selection, where we can hopefully find the same premium and high-growth dynamic in potential stocks to buy.

To save you some time and a lot of charts, let me break it down for you, here are the best stocks when it comes to EPS growth and forward P/E premiums in all of the hot sectors above:

• Refining and Marketing: CVR Energy ($CVI), which is owned by Carl Icahn

• Exploration and Production - USA: Antero Resources ($AR)

• Drilling: Patterson-UTI ($PTEN)

Which of these do we pick? Do we take them all?

I guess you’ll have to wait a few days while we perform the proper due diligence on each of them, or you can follow us on Twitter to get a live alert on our decisions regarding these names.

For now, let’s go over a quick rundown for $CVI to give you a feel for what we’re facing right now:

One of the most aggressive EPS growth rates 🔥 and trading at a forward P/E premium, this stock gives us a low enough forward PEG ratio to assume most of that growth has not been priced in yet.

Based on these outlier valuations and growth potential, we decided to take a look into the charts, sort of time our potential entries and exits, which look like this: 👀 

Consolidation for the past month means no new sellers are coming in to push the downtrend further. Now, we just need to confirm that buyers like the stock enough at this price.

To do this, we can look at what’s called the volume and market profile; let me explain what it means for CVI:

That thick red bar means the most volume (for the year in this case) occurred at the current price, which stopped the stock from falling further. Thus, we can somewhat assume that this was, in fact, buying pressure.

So, we are basing our entries at any price below $23 🎯 for this stock. When it comes to the exit, $27 is an excellent level to test for momentum and potential continuation.

If we get past $27, I feel good holding this to $30 at least before considering adding or hedging this run. By the way, that’s a 30.4% rally 🔥.

NOW GO AND MAKE IT HAPPEN
Get a Future Feeling

Understanding the oil industry and where it’s trending is key for some of these trades, and that’s something you need to keep in mind when digging into these sorts of ideas.

Today’s book recommendation 📖 is supposed to help you with that, as it did to me, and it can make you a better energy investor moving forward.

To your success,

G. 🥃