How to Play the Energy Sector Right Now
Natural gas and crude oil are headed in opposite directions. Here’s how trade it, including three stocks in the group with great-looking charts.
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I’m getting a lot of questions recently about the energy sector in general, and oil stocks and natural gas stocks in particular. Folks want to know if the recent bounce in oil prices is a tradable event, and if beaten-down names in the energy sector might have some upside here.
To get a feel for the energy sector, let’s look at the Energy Select SPDR XLE. This energy bellwether dropped like a brick on Wednesday after slamming into a bearish trendline that has been intact since April. It was the fourth consecutive rejection at that trend line (red arrows).
This bearish chart is the reason why the energy sector didn’t appear among my top sectors in this week’s road trip article.
Despite this, there are some great charts in this sector, mostly in natural gas names.
Williams Companies WMB is a Tulsa-based natural gas processing and transportation company. Shares of Williams are providing impressive returns, gaining 32% year-to-date and 42% over the past twelve months. On Wednesday, Williams traded at its highest level since 2015.
Targa Resources TRGP is also putting up impressive gains, rising 74% year to date and 80% over the past twelve months. Houston-based Targa is a midstream energy infrastructure provider.
Oneok OKE also has a great looking chart.. This Tulsa, Oklahoma-based natural gas provider has gained 30% year to date, and 49% over the past twelve months.
Oneok is a master limited partnership. These entities are taxed differently from common stock, so be sure to consult a tax professional if you are unaware of the tax implications of an MLP.
While natural gas stocks are rallying, oil stocks are losing ground. Crude oil itself is also weak.
Because crude oil has been trending lower for several months, I recently wrote about shorting oil, and that’s still my game plan.
I’ve lowered my entry slightly to $74.25 (green), which is at the extreme upper range of West Texas Intermidiate’s bearish channel (black lines). My stop (red) and targets (blue) have also been lowered slightly, in order to keep this setup within the boundaries of the channel.
If the first target is hit at $71.25, I plan to lower my stop to the entry point of $74.25.
I still believe oil will weaken due to lower demand, as the global economy sputters. Even with international tensions at a boiling point, oil rallies have met with intense selling pressure. I believe that's the market's way of telling us that barring an extreme uptick in international tensions, oil will continue to have difficulty sustaining a rally.
At the time of publication, Ponsi was long TRGP and WMB.
