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Triple-Digit Oil Calls Suggest Floor Under Energy Stocks
Goldman's clients are asking about oil prices, and particularly about the read-through of recent increases for equities.
While not an especially novel observation, one implication of higher oil is that energy shares should do well, or at least relatively well. That ostensibly intuitive assumption didn't hold this week, when energy stocks were lower with everything else, but they outperformed the broader market in eight of the preceding nine weeks, and in 10 of the preceding 12.
Brent's up some
So what’s your next move?
I will attest to the oil, meta calls. H is the GOAT y’all.
I followed my leader into energy and the bills. Thank you, thank you, thank you…….If you need a kidney, give me a call.
We often forget that higher crude prices are a double-edged sword for the integrated producers, such as XOM, which produce chemicals and other products from part of their crude and natgas output. I’d guess that the integrated producers carry more weight in the sector indices?
While traditional energy companies may be up, alternative energy yieldcos are way down, as are some solar energy-related manufacturers. The yieldcos are interest-rate sensitive, so if we believe that interest rates are going down in a year or two, then adding more of these at current prices not only locks in high yields, but also could see some capital appreciation. Regarding treasury bills and notes, it is tempting to buy 5-10 year notes at current yields, with the plan to sell them if rates drop, for some capital gain and in order to buy stocks (which might have dropped due to recession). Or just hold the notes if that’s how things work out. >4% with some tax advantage isn’t bad.
H-Man, it seems there is more downside risk to oil than upside if you assume the global economy is running out of gas. I will leave it there.