Two Ways to Play Energy and Oil

Despite record depletion of oil due to war in the Middle East, traders seemed to take plans to release strategic reserves as an offset to other negative headlines.

On Tuesday, the U.S. Energy Information Administration (EIA) announced the release of more than 53 million barrels of crude from the U.S. Strategic Petroleum Reserve. The 32-member countries of the International Energy Agency (IEA) unanimously agreed in March to make 400 million barrels of oil from emergency reserves available to the market.

The US energy entity also said Tuesday that it expects the critical sea lane for oil transport, the Strait of Hormuz, to be effectively closed through the end of May. Later Tuesday, the New York Times cited classified assessments showing Iran regained access to most of its missile sites including those along the Strait.

Meanwhile, President Donald Trump meets Chinese President Xi Jinping Thursday and Friday in China, a key Iran trade partner and oil buyer. As we noted yesterday, the Trump-Xi meeting agenda will be full, with discussion about Taiwan and trade. With stagnant Iran oil output as the U.S. negotiates Strait passage, President Trump has discussed the possibility that China could buy more U.S. oil and gas.

This may not move the needle for massive international exploration and production companies with exposure to Alaska oil production, just across the Bering Sea from Russia, and close to the coasts of Japan, Korea and China. BP (BP), ConocoPhillips (COP), ExxonMobil (XOM), and Shell (SHEL) have been raking in profits with healthy margins from integrated exploration, production and refining capabilities at high oil prices.

Chevron Corporation (CVX), the global oil-and-gas player, is investing $10 billion in U.S. energy projects this year. Its operations include oil refineries in California, where it has operated for 140 years, and the Gulf of America. Chevron is also one of the many U.S. companies producing oil in the Permian Basin; that Texas oil field is projected to account for half of U.S. oil production by 2030.

One fund exposed to oil-related equities traders and investors can watch: The State Street Energy Select SPDR ETF (XLE), with roughly $41 billion in assets tied to oil, natural gas, fuel and related equipment and services within the S&P 500 Index energy sector. Its top 10 holdings account for roughly 75% of assets including XOM at nearly a quarter of the total, followed by CVX, COP, SLB (SLB), and The Williams Companies (WMB). The fund has returned nearly 30% so far this year and boasts a 2.5% yield. XLE’s performance chart shows a triangular price pattern that suggests narrowing price activity bouncing around in a shrinking range. Low volatility can be a precursor to high volatility if one of the boundaries eventually is breached.

Rick Ducat, Schwab Network Lead Market Technician, contributed to this Market Minute.

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