Summertime Delivers Rally in Crude and Energy Stocks

Matthew Carr By Matthew Carr
Emerging Trends Strategist

Oil & Gas

Investors are often their own worst enemies.

Volatility causes anxiety… and then panic sets in.

As Mike Tyson famously said, “Everybody has a plan until they get hit. Then, like a rat, they stop in fear and freeze.”

This is why the average investor underperforms the S&P 500.

Just a little more than a month ago, crude markets were in a panic.

The threat of OPEC increasing output caused prices to crater. From May 21 to the first week of June, U.S. crude prices tumbled more than 10%…

Investors suffered through a few weeks of pain as the markets pondered the impact of OPEC’s potential production hike.

It was a dark time. But I preached patience.

I stood firm in my belief that crude would hit $75 this year. And it hit that milestone during intraday trading last week.

As we can see below, U.S. crude rocketed skyward to close just cents away from $75 per barrel last Tuesday…

Since June 21, oil is up more than 12.4%.

As I’ve written here previously, the U.S. was entering the biggest travel time of the year. That meant a surge in fuel consumption.

For weeks, as the U.S. summer driving season sped off, stockpiles at the oil hub in Cushing, Oklahoma, were falling to 3 1/2-year lows. And at the end of June, gasoline stockpiles fell 1.5 million barrels, almost double what the market was expecting.

Plus, there was another catalyst that catapulted prices higher.

Suncor Energy’s (NYSE: SU) Syncrude Canada oil sands facility suffered a tripped power transformer that shut down the entire complex. And it’ll be down for weeks.

The Syncrude facility pumps out around 350,000 barrels per day of crude. So this instantly applies pressure to the North American market.

The facility is expected to be offline for all of July. Then it should be back, operating at between 60% and 70% capacity in August.

Of course, there’s also Venezuela’s collapse, Libya’s struggles, Angola’s falling production and new sanctions being levied against Iran.

This is all unfolding as we race headlong into earnings season.

The Best Month of the Year?

Now, I believe July is poised to be an excellent month for the stock market. Quite possibly the best we’ve seen so far this year.

There are a ton of positives for both consumers and corporations. And we’re going to see that reflected in revenue and earnings beating expectations.

This should pull the focus from what’s boiled over into a full-blown trade war. And it should send the markets bouncing higher.

In the first week of trading in July, the Dow Jones Industrial Average has already gained more than 700 points, while the S&P has shot up nearly 3.2%.

For the second quarter, the S&P 500 is projected to report 20% growth in earnings.

This marks the second-highest earnings growth for the index since the third quarter of 2010.

The only better quarter in that span was the first quarter of this year, when S&P earnings shot up 24.8%.

At the center of this is the energy sector. It’s recording the largest estimated earnings increases.

In fact, analysts now project earnings for the sector will rise 142.5% year over year. That’s up from the initial 115% increase that was forecast at the end of the first quarter.

A lot of optimism is percolating here.

At least a dozen companies have seen estimated earnings per share (EPS) increases of more than 10%.

For example, over the last 90 days, Chevron’s (NYSE: CVX) second quarter EPS expectations have risen from $1.69 to $2.12. Anadarko Petroleum’s (NYSE: APC) EPS estimates have moved higher from $0.35 to $0.51. Occidental Petroleum’s (NYSE: OXY) have increased from $0.69 to $1.22. And Helmerich & Payne’s (NYSE: HP) have seen a 300% increase… albeit from $0.01 to $0.04.

Admittedly, the oil sector was already in good shape heading into earnings season. But the year-over-year comparisons are still extremely favorable.

Let’s not forget that crude has been crushing it in 2018. Prices have jumped more than 22%. And over the past 12 months, the performance has been even better.

Looking back, we see crude averaged $48.15 per barrel in the second quarter of 2017. In the same quarter of this year, it averaged $67.15 per barrel. That alone is an increase of 41%.

Plus, the S&P is expected to report the highest revenue growth since the third quarter of 2011. And not surprisingly, considering the setup, all six subindustries of the energy sector are projected to experience double-digit earnings growth.

For instance, it’s predicted the Energy Select Sector SPDR ETF (NYSE: XLE) will see a 7.7% move up by the end of September.

And the SPDR S&P Oil & Gas Exploration & Production ETF (NYSE: XOP) is expected to see an even bigger move of 11%.

Year to date, the Energy Select Sector SPDR ETF has trailed the market and crude, gaining just 4.6%. The Oil & Gas Exploration & Production ETF has done much better, increasing 16.5%.

As the saying goes, “Money follows earnings.” And as we head into second quarter results, there is no sector with a more bullish outlook than energy.

Demand is up, supply is down, and prices are surging. Not to mention my $75 price target, which I had to defend earlier in the year, is suddenly conservative as other analysts have started ratcheting up their price targets.

Good investing,

Matthew