Morning all.
I’m sure most of you have caught some $oil headlines, an unprecedented situation unfolding where a futures contract went into negative value. This is quite spectacular and even though I hold no Oil related investments at this time, these kind of events get my attention as an investor.
For companies involved in Oil, whether that be exploration, production, refining, transporting, storage etc, the value of the asset central to their existence became worth less then ZERO! Some of that is technical and future value is not zero, but for right at that moment it was true and clearly points to big problems for the industry.
Imagine running a business where you had to pay people to take your product from you! Doesn’t sound fun or viable for long.
I’ve mainly stayed away from Oil as I’ve been worried about the threat from renewable energy and never liked the manipulation OPEC had to move the price around. But when the price get to zero it’s time to get interested because the current situation where output is so mismatched to demand will not last permanently.
With global travel at a standstill right now and that situation likely to persist a little while longer yet, I’m not thinking today is the day to start buying Oil stocks, but I think now is the time to start looking around and thinking about it.
I was surprised to look at the 2 most relevant ETF’s here on eToro and find that prices are considerably higher than they were last month. With this crisis around Oil storage and the price, I’d have expected them to be bouncing along a bottom, holding on for dear life!
These two ETF’s are:
$XLE $32.89 +43% off the lows.
$XOP $43.01 +45% off the lows.
They are some very serious gains for anyone who jumped in last month. It’s hard to think about buying them after such huge rallies and very surprising to consider they’ve held onto those gains, XOP was actually positive yesterday!
I don’t like this dislocation between the price of the asset and how well the equities are doing and it suggests that expectations are high that demand will return soon and with strength. I think both of those assumptions are overblown.
Some demand will return for sure as we already see some countries starting to ease their lock down measures but I think international travel will remain in the doldrums for much longer and any returning demand will be weak. There is also the prospect of 2nd wave infections which could bring back some lock down measures in the Autumn and I don’t think any market is pricing in that risk at the moment.
So for now, I’m starting to watch the energy sector but I don’t feel comfortable with the idea of buying anything.
$XLE , if taking the ETF route does look like a good option when the time comes though, it has exposure the the biggest players which should ensure balance sheet strength and currently the dividend yield is close to 7%. Those dividends could be under threat as profitability will suffer with Oil prices so low, but if prices come down and this level of dividend can be paid in future, that is a fantastic yield to add to the dividend part of the portfolio.
I’ll do a separate post looking at the 2 ETF’s this week as they are quite different.
Stay safe, thanks for your time.
$SPX500 $DJ30 $USO
