Key Points
- Energy stocks are bubbling to the top after reporting windfall profits.
- Energy stock profits are tied to oil prices and oil prices are not going down.
- Dividends and share repurchases should support a new high in the XLE.
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If you are wondering if it's too late to get into energy stocks the best answer is no. Energy prices are down from their peak and there is a potential slowdown in demand on the way but, for now, the underlying fundamentals are highly in favor of higher share prices. Not only are these companies raking in “windfall” profits but they are on track to return a bundle of that cash to investors. Companies from Exxon Mobil (NYSE: XOM) to Chevron (NYSE: CVX) and BP (NYSE: BP) have already turned in their reports and confirmed this outlook, companies like Occidental Petroleum (NYSE: OXY), ConocoPhillips (NYSE: COP), and Marathon Oil (NYSE: MRO) are yet to do so and will most likely do the same. The takeaway for investors is that windfall profits are going to continue for the foreseeable future and may even get better before they get worse.
Oil Prices Are Underpinning Windfall Profits
Oil prices are underpinning the windfall profits and those are not likely to come down substantially from their current levels. The Russia/Ukraine conflict has been priced into the market by this point which leaves the fundamentals to support the market and the fundamentals are bullish. Point the finger where you will but global capacity has been constrained on many levels and does not support the idea of lower oil prices. The IEA, for one, is forecasting global demand to run at 101.3 million barrels per day in 2023. That’s up slightly from 2022 and offset by production that is averaging 101.2 million barrels per day in 2022. As small as it is, the balance is tilted in favor of demand and that will keep prices up. There is a chance that producers like OPEC or the US, the two single largest production entities with any hope of truly rebalancing the market, but don’t hold your breath.
Turning to the chart of WTI, the US benchmark for oil quality standards as well as prices, the market has established a new range with a bottom at $80. It looks like the market may try to equalize around a new “normalized price” that could be anywhere from $80 on up at this stage in the game. The most recent weekly action shows strong support at this level and the indicators are in support of this analysis.
The indicators, stochastic oscillator and MACD histogram are set up, in fact, to fire a very strong bullish signal for oil prices with the next upswing in prices (if it comes, it may not although it appears to be on the way). Such a signal, where the MACD makes its bullish crossover in support of the bullish signal the stochastic is already firing, could take this market up above the $100 level but there is a risk. There may be resistance at the $96 level at or just below the 30-day EMA but, if the market can get above those levels, they will only add strength to the bullish case as previously bearish short-term and swing traders turn bullish. The bottom line is that oil prices will be at or above the current levels for the foreseeable future and fuel the windfall profits in the energy sector.
The Energy Sector Is In An Uptrend And New Highs Are At Hand
Looking at the Energy Sector from the dividend perspective, the Energy Sector SPDR XLE (NYSEARCA: XLE) is yielding about 3.4% and is up more than 30% after correcting earlier the year. Others within the group, like Exxon Mobil and Chevron, yield better but those with the lower yields have the most robust outlooks for dividend increases and they all have bullish-looking charts. The action in the ETF is supported by results in the sector and the indicators which are both bullish. A move to a new all-time high would be a trigger for new bullish positions and would come with a target near $110 which would be a new all-time high and a 22% gain from the current price levels.
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