It’s been frankly impossible to try and trade our energy portfolios while trying to gauge the effects of a very unpredictable Trump administration.
For example, what would have happened in the oil markets if Obama or Bush had put out a statement like THIS:
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The Iranians have been publicly protesting the United States with burning Presidential dummies and American flags and promising the ‘mother of all wars’ since the revolution began in 1979. Still, a reaction like this from another American President would have caused an immediate three to perhaps five-dollar rally in oil, with a secondary rally dependent upon the Persian Gulf military maneuvers that would have followed.
Instead, the oil markets barely moved on Monday, relying instead on a surprise 6.1m barrel drop in inventories on Wednesday to move oil prices higher. Bottom line is, the markets have been trying their best to ignore the President and his tweets, despite their incendiary tone.
The brewing Trade War may be different, however. Not only have steel and aluminum tariffs begun to be enforced, but Trump is targeting another $500b in Chinese goods. Meanwhile the EU is planning $20 billion in tariffs should the new Trump break from EU automotive penalties fall apart, while Mexico has slated $3 billion and Canada $14 billion of reciprocal tariffs.
While Trump seems satisfied so far with his trade war, the Chinese don’t need to play this game of reciprocal taxes. Pushed far enough, the Chinese will target individual companies like GM and Apple, both of whom have their largest markets in China. Most worrying, the Chinese have shown zero interest in negotiations – and have registered some pretty hyperbolic talk at the WTO of their own.
So, what should we do as energy investors? Is the time right to get into energy stocks, now that oil prices have moderated, even as fundamentals remain incredibly bullish? Or is this the start of a globally destructive trade war which will annihilate oil as it has already done with grains and metals prices? When do we listen to the news and when do we ignore it?
One financial trend that gives me continued reason to stay long oil stocks in the face of this ratcheting trade war is the decline of speculative longs from the oil markets in recent weeks. Now, normally, one might think that this retreat of hedge funds from oil would be bearish. But my experience has been that it is instead a very healthy move for the long-term trend of bullishness that we know is in place, especially when the number of speculative longs has been so historically high recently. To put it simply, it helps oil go higher when everyone isn’t long already.
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As for the right stocks to invest in, I have continued to try to find better values than the stalwarts I continue to recommend. Nothing would be better than finding a new idea in a space that we know is likely to continue its advance. But, I’ll be honest, I can’t find many quality new ideas that represent a better value than the ones I continue to harp on. Instead, what’s seemed to work out best for me has been to wait for overpriced ideas to moderate before buying them, while getting lighter on other stocks that have been creating new highs, despite a moderating crude price.
With this in mind, it might be a good idea to look at adding to a name like Continental Resources (CLR), on the back of their disappointing quarterly production report, while thinking about taking some money off the table from a name like Anadarko (APC), a straight climb upwards since March.