Talk about losing energy.
Now the only S&P 500 sector in the red for 2019, energy has had a difficult week, falling more than 4% as soft economic data reignited fears around slowing global growth and the impact of intercontinental trade disputes. The Energy Select Sector SPDR Fund (XLE), which tracks the space, was practically flat Friday despite an uptick in oil prices.
There’s one major factor impeding energy’s gains, says Steve Chiavarone, vice president and portfolio manager at Federated Investors.
Oil prices spiked after a coordinated attack on Saudi Arabia’s oil supply last month temporarily took down half of the kingdom’s production capacity. But production is reportedly being reinstated faster than expected and prices have fallen.
“I think the point to hit home for the sector is that with that kind of supply disruption unable to bring prices higher, demand needs to pick up,” Chiavarone said Friday on CNBC’s “Trading Nation.” “Unless you have a scenario where global growth is picking up meaningfully, then I think oil prices are going to be restrained and it puts a cap on the sector.”
While Chiavarone wasn’t completely bearish on energy, he said it would likely take a while for demand to get back to sustainable levels.
“With global growth and manufacturing as soft as it is right now, we think that can happen as we roll the calendar maybe into 2020,” he said. “In the meantime, we’re still in decelerating growth and stimulus mode.”
Chiavarone recommended “names that pay a yield” to investors hungry for energy exposure. BP, Occidental Petroleum, Exxon Mobil and Chevron all have fairly high dividend yields relative to other stocks in the group.
“We think with further rate cuts, they’ll become more attractive,” he said. “Valuations are a little bit intriguing for the longer term, but right now, we think there’s just a little bit more chop to come.”
Bill Baruch, founder and president of Blue Line Futures, agreed about the potential for near-term chop.
“I’ve been bearish [on] crude oil and the energy sector,” he said in the same “Trading Nation” interview. “I think there’s lower to go, but a lot of that narrative has played in here in the near term: deteriorating global growth, the seasonally weak time of year, the fact [that] Saudi Arabia was able to come back online quickly.”
In the charts, Baruch saw an assortment of risks, suggesting investors be contrarian and “fade a bounce” in the broader sector, should one come.
“If you look at … the majors like Chevron, you have a death cross there, and I think that’s going to bring a tailwind lower,” he said, referring to the instance of a stock’s 50-day moving average crossing below its 200-day moving average.
“I expect further pressures there,” he said of stocks like Chevron and Exxon.
For investors looking to buy the dip, Baruch steered them toward a domestic drilling play.
“If … you’re trying to find somewhere to invest in the energy sector here just in the near term, there is some value in places like Devon Energy,” he said, pointing to its long-term chart.
“You have a long-term trend line [that] comes in near 20 bucks. It’s priced very cheaply as well,” he said, suggesting investors “look for a move back up to one of the trend lines.”
“It could get above 30 bucks if this sector starts to pick up a little bit,” Baruch said. “But overall, I think rallies are better to be faded here.”