XLE: Due to the rise in energy prices (NYSEARCA:XLE)

0
136
Bubba Trading profile picture

Brent Crude Oil, Natural Gas and Heating Oil prices rising and positive percentage price changes on the trading screen for Commodities.

Torsten Asmus/iStock via Getty Images

Two years ago, WTI crude oil prices fell below zero near the NYMEX. Brent crude oil fell to $ 16 a barrel, the lowest price in this century. Natural gas fell to a 25-year low of $1.432 per mmBtu. The worldwide pandemic evaporated the demand for energy because People took refuge in their homes, travel ground stopped, and working from home became the norm.

In 2021, the election of Joe Biden was a clean energy referendum. The new administration “went away”drill-baby-drill” And “tail baby tail“Policies that were supported by the previous administration. Supporting alternative and renewable fuel sources and curbing fossil fuel production and consumption were a dramatic policy shift that gave pricing power to the international oil cartel and its non-member partner Russia. Fossil fuel prices rose throughout 2021.

In 2022, Russia’s invasion of Ukraine and sanctions raised supply fears. While green energy may be the future, hydrocarbons continue to power the world.

The US administration’s energy plans prompted many traditional oil and gas companies to change plans and strategies and created entry barriers for new entrants. Meanwhile, a small group of existing oil, gas and related companies have experienced earnings gains in the form of price increases. Energy Select Sector SPDR Fund (NYSEARCA: XLE) owns shares in US conventional energy companies.

Energy market calms down after recent explosive price volatility: Three reasons why conventional energy prices remain high

Late last week, May NYMEX crude futures closed just below the $100 per barrel level. The energy commodity price was trading in a wide range from $93.53 to $130.50 in March.

Bullish trend in oil futures market

Monthly NYMEX Crude Oil Futures (cqg)

The monthly chart shows the wildly price action in the oil market in March.

Volatility has declined in previous sessions

Daily NYMEX Crude Oil chart with historical volatility (cqg)

The daily chart highlights that the daily historical volatility declined from 104.83% on March 14 to the level of 75% on April 1st.

Natural gas price action

Monthly NYMEX Natural Gas Chart (cqg)

The monthly chart shows that the last time natural gas prices were at the $5.70 per mmBtu level was in April 2008.

Three factors support fossil fuel prices as we move into the second quarter:

  • Crude oil posted gains for the eighth consecutive quarter in the first quarter of 2022. Oil and gas prices are trending higher.
  • Tensions between Washington DC and Moscow will continue even after the end of the war in Ukraine. Russia is an influential non-member of the international oil cartel.
  • Russia will use oil and gas as a political weapon. US energy policy in favor of alternative and renewable fuels and constraining the production and consumption of fossil fuels will continue to impact production. Oil and gas are the commodities of energy that power the world.

On March 31, OPEC did not increase production, increasing production to a fixed 432,000 barrels per day. US President Joe Biden announced the most important strategic petroleum reserve release of one million barrels per day, which could amount to 180 million barrels. The president blamed the pandemic and Russia’s Vladimir Putin for the high oil prices. He did not mention the central bank liquidity and government stimulus that lit the inflation fuse. He did not mention his administration’s energy policy that supports alternative and renewable energy sources and prohibits fossil fuel production. The president said his administration plans to rely on US oil companies and tax unused leases. However, oil companies cannot ramp up production because it requires labor, and policies from early 2021 have forced oil workers to find other jobs in an already tight labor market.

Each previous SPR release initially lowered oil prices, but the energy commodity moved to higher highs. Time will tell whether the most significant release will cause crude oil and oil products to follow the same path. Energy policy, inflation and US foreign policy have all indicated a rally in the oil market over the past few months. Before the US election, the price was below $40 a barrel in November 2020. Nearby NYMEX crude oil futures settled slightly below $100 on April 1.

Conventional energy producers benefit more from higher prices

One of the unintended consequences of US energy policy is creating a virtual monopoly for major integrated US oil companies. Regulations, cancellation of pipeline projects, prohibiting drilling and fracking, and political pressure created entry barriers to any competition. Higher oil prices have propelled shares of the leading oil company higher in 2022, making the oil and gas sector the best performing sector on the stock market. In Q1, the S&P 500 went down 4.95%, but a surge in energy gains pushed energy stocks to lead the stock market.

Production costs have increased, and the US has become more dependent on oil imports since early 2021. LNG has expanded the addressable market for US natural gas beyond the pipeline network into natural gas. While US prices are at their highest in 14 years at $5.70 per mmBtu level in April 2022, prices in Europe and Asia are trading at manifolds.

Meanwhile, investors in US oil companies rely on management to deliver returns. The administration can exert public pressure on oil companies, raise taxes on unused leases, and use other means, but it cannot legally prevent them from making money in the capitalist system. Oil companies lost fortunes in early 2020 as the pandemic gripped the energy complex. The capitalist system means that the government cannot allow companies to suffer losses when market prices rise. In addition, US energy policy, central bank liquidity and government stimulus lit the fuse of bullish and inflationary oil and gas markets. Russia may have added fuel to the fire, but the original ignition was the energy, monetary and fiscal policies of the US government.

The bottom line is that management’s job is to optimize investors’ returns.

XLE owns shares in major conventional US energy and energy-related companies

The Energy Select SPDR Fund (XLE) owns shares of major US oil and gas companies. Top holdings include:

XLE's Top Holdings

Top Holdings of the XLE ETF Product (yahoo finance)

At $77.06 per share as of April 1, XLE had approximately $37 billion in assets under management. The ETF trades an average of over 45.27 million shares each day and charges a 0.12% management fee.

Trend remains higher in XLE

In Q1, the S&P 500, the most representative and diversified US stock market index, lost 4.95%.

XLE ETF Bullish Trend

Chart of the XLE from the end of Q4 2021 to the end of Q1 2022 (Bar chart)

The chart highlights the increase from $55.50 on December 31, 2021 to $76.44 per share on March 31, 2021. XLE posted a 37.7% profit in Q1 2022. XLE was a bit high on April 1.

Rising profits from integrated oil and gas producers and related companies have pushed XLE higher, which remained in a bullish trend on April 1.

APS is long XLE and will be long until trend turns short

As of April 1, 2022, XLE shares were trending higher. APS were long XLE stocks because trend is always your best friend in all markets. APS has 10 highly liquid and alternative stock and ETF products. XLE is a component because it meets the requirements of the strategy. At $76.97 per share, the ETF isn’t down from its recent high of $80.22 on March 8.

Following trends through an algorithmic system requires strict adherence to rules. We do not try to take bottoms or tops in any market and usually go short on the bottoms and long on the top. Taking the most significant percentage out of trends requires taking away the emotional impulse from trading and investing. We ignore the fundamentals, the news and the daily hustle and bustle. Our signals are never intraday. They can only change at the end of a session. Our system does not get bogged down in daily frenzied trading activity. News and noise are at a frenzied level in Ukraine with war, sanctions, concerns over energy supplies and the US administration’s move to drop oil from the SPR and punish oil companies. APS is Always Its components long or short.

The price of any asset is always the true price as this is the level where buyers and sellers meet in a transparent environment, the market. The crowd behavior that determines trends may be the optimal market outlook across all asset classes. Since April 1, crowd sensibility points to a bullish trend in XLE. When the trend changes, APS will issue a sell signal for ETFs that hold stocks of major integrated oil companies and other traditional energy-related companies.