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Macro Valuation® | Report – Oil Stocks

Oil Stock Valuations Face High Uncertainty

Our recent articles on oil prices and oil stocks raised several risks to the oil price and broader economy.  Given where we are in the global economic cycle, the article argued a negative view on oil prices going foward.  This can be considerered a contrarian view point but in addition to the points already raised in our last post, there are more reasons to be cautious.

The fact that oil futures are in backwardization at the moment is not because of demand, it is about supply management led by Saudi Arabia.  We view this as not sustainable as oil pushes the $100 USD mark.  If it does go above this level, central banks like the FED and ECB will be forced to raise rates and risk a hard landing.  This is not the best scenario for Saudi Arabia.  It is happy if oil stays in the $90 to $100 USD.   Thus, expect statements and then action to increase supply by Saudi Arabia, if the price looks to escalate much higher.

Another factor is the general market in the US which is overpriced.  Considering the multitude of risks currently present, it is not surprising that the volatility index, VIX, is showing signs of moving towards backwardization.  The forward curve is more flat now.  What this means is that the market is very nervous and volatility could spike up.

This is also true of volatility on idividual energy stocks like Exxon (XOM) and British Petroleum (BP) plus others.  The volatility for put contracts which are bets on the stocks towards the downside is much higher than the volatility on call contracts.   We had taken positions to short the energy sector and looking at recent moves we have added to these positions.   We see downside in the energy stocks in the near to mid-term due to unsustainable oil prices at around $100 USD per barell plus risk that the broader market faces a correction.   At the moment, we hold put option contracts on the following two stocks.

BP Price Chart

XOM Price Chart

This post is for education purposes only and is used to broadly illustrate how a trader interprets the current market sentiment around energy stocks to make a trading decision utilizing the global macro strategy.  To further enhance the learning experience, we will follow-up with a post showcasing the results in the future.  Please read our disclaimer and terms and conditions as this information is for educational purposes only.