An Interesting Tale
It seemed unlikely. For a good while, U.S. dollar valuations have not broadly come in much. In fact, despite some weakness for the greenback over recent days, the planet's reserve currency stands stronger versus a basket of high-quality competition than it did two months, three months, or even one year ago. Despite the pressure that one might expect that a stronger dollar would place on commodities priced in dollars, crude oil has marched on, methodically rising against this tide of obvious opposition.
On Thursday, West Texas Intermediate, the sweet stuff, traded at a 2019 high. In fact, overnight pricing that approached the $59 per barrel level are the highest prices seen since November. On the one hand, we all know the shale story by now. U.S. production has surged, acting in good measure to work against cuts in production implemented by members of what is now referred to as "OPEC plus." That group of producers, the OPEC cartel led by the Saudis and the "plus" grouping led by Russia, have worked to balance this market -- as have U.S. sanctions working against Iran and a combination of similar sanctions and the outright collapse of the nation's economy in Venezuela.
OPEC released their monthly report on Thursday. Production dropped again. The pace of the decline seemed to slow, but still, the decrease was evident. 30.5 million barrels per day. The group lowered its outlook for demand for their product to 30.4 million bpd. That would be both the result of the shale squeeze and concerns about demand generated by global economic growth. Slowing growth in China and across Europe would be the glaring concern there.
"OPEC plus" will be in Baku, Azerbaijan this weekend in order to discuss extending the effort to constrict the supply side of the oil market. This is ahead of next month's more formal cartel meeting in Vienna. U.S. inventories surprised to the downside this week. I gave you the oil / energy trade back at the depths of mid-December. Some folks have asked very recently if I think it is yet time to bail on this and take the money off of the table. I have some thoughts here.
The Blackness of Night
I stare out of my office window. Darkness. Two porch lights across the street are visible. The certainty exhibited by these two beacons in the night strike up in my brain a conscious level of contrast. I am in no way certain that WTI can return to the extreme highs of early October, but I do think that good potential for further gains does exist. Perhaps, this $59 level is yet another swinging door.
Regardless of actual economic condition, the perception of an improved condition between the United sates and China is a pro-growth story. This will work to put a bid under crude until there is clear evidence of a breakdown in negotiation between the two sides.
In addition, with economic growth stalling around the planet, even in the U.S., central bankers now appear to be moving in concert toward doing whatever it takes to foster an easier environment. If the PBOC, the BOJ, the ECB and the Federal Reserve all start swimming in the same direction, I don't know if that softens the dollar much, but it is another positive growth story. A weakened dollar would simply be an awfully nice dollop of whipped cream on your sundae. But even without, you're still eating ice cream. Know anybody who doesn't like ice cream?
At The Ready
I have no problem with anyone who is sitting on a profit moving to protect found gains. That said, with a little dollar weakness, with a recession avoided in dangerous places, with just a touch of geopolitical help, the thought in my brain is that the top for WTI will not be found lower than $62 (support level from last summer). Most of you know that my favorites in the space have come from the exploration and production side, and that my interest had been originally generated by my search for a group that both offered fat dividend payments while remaining exposed to potential growth.
There are some that will point to the energy sector's aggregate forward-looking P/E ratio of 17.9x versus just 16x for the S&P 500 and see over-valuation, especially as expectations for sector earnings and revenue growth for the first quarter largely place the group in last place. To counter that, I point to the fact that this recent surge in price is not over, and not priced in. I might also add that this 17.9 forward looking earnings multiple isa 37% discount to the sector's five year average. Compare oranges to oranges.
My favorite names remain British Petroleum (BP) , Chevron (CVX) , Exxon Mobil (XOM) , and Royal Dutch Shell (RDS.A) . Having been long all four, I had taken my own profit in Chevron. That name has continued to run, and just may be best in class. I look to re-enter given the weakness that seems to automatically follow these OPEC type events.
The time is coming to once again to consider an initiation level of exposure to oil services. For me, this will be a Schlumberger (SLB) long, as I favor the firm over Halliburton (HAL) . Oil services have not worked for me nearly as well as exploration has in recent years, and have not worked as an investment nearly as well as has exploration. I'm not pulling this trigger today, but it's on my radar. I'll keep readers apprised as we move forward.
Oh by the way, easier monetary policy forces a higher earnings multiple upon dividend payers. Let's also keep that in mind. You do see the Dow Jones Utility Average hanging around all-time highs, right?
Answers To Questions
1) Yes, I will likely add to Adobe (ADBE) on this weakness. Depending on how this impacts the rest of the cloud, I will be watching Salesforce (CRM) , ServiceNow (NOW) , Microsoft (MSFT) , Amazon (AMZN) and yes, Zuora (ZUO) , for a chance to add at discounted pricing if I see those names unjustly punished.
2) Ulta Beauty (ULTA) -- talk about firing on all cylinders. Gee whiz. Same-store sales. E-commerce. Margin expansion. Color me impressed. Are you flat this name, like me? There may be a day-trading opportunity here. Back to the drawing board on this one.
3) I can wait a day or two to enter Broadcom (AVGO) . I never, ever, chase. That's an emotional reaction, and there's no room for that here.
Economics (All Times Eastern)
08:30 - Empire State Manufacturing Index (March): Expecting 10.0, Last 8.8.
08:30 - Industrial Production (Feb): Expecting 0.4% m/m, Last -0.6% m/m.
08:30 - Capacity Utilization (Feb): Expecting 75.5%, Last 75.2%.
10:00 - U of M Consumer Sentiment (March-adv): Expecting 95.5, Last 93.8.
10:00 - JOLTs Job Openings (Jan): Last 7.335M.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 834.
16:00 - TIC Net Long-Term Flows (Jan): Last $-48.3B.