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XLE: The Energy ETF

Oil is pushing higher again today and the magnet of $100 per barrel will be getting stronger. Oil producers' Q4 earnings have been good as they have been able to benefit from the steep increase in energy prices and demand has remained steady as economies remain open.

Weekly Index Analysis

The US Energy Information Administration reported today that crude oil stocks decreased by 4.8 million barrels to 410.4 million barrels over the past week. The US crude oil refinery input averaged 16 million barrels per day, up by 328,000 barrels per day from the week prior. In addition, refineries produced 9.4 million barrels of gasoline per day, operating at 88.2% of their capacity. US crude oil imports averaged 6.4 million barrels per day last week, 700,000 fewer barrels per day than the previous week. The total commercial petroleum inventory fell by 8.1 million barrels.

The surprise draw on inventories helped the price of oil rise over 1% by the end of the London session which has gone some way to reversing the week's decline.

Investors looking to profit from these elevated oil prices could look at investing in an ETF that consists of energy companies. Unlike mutual funds, ETFs can be purchased or sold on a stock exchange, just like any other type of stock. They typically track an index, sector, commodity, or other assets. ETFs can track anything from the price of a commodity to a collection of securities. They can even be designed to track specific investment strategies.

The XLE is an industry fund that focuses specifically on the energy sector.

The top 5 companies by index weighting within the XLE are:

  1. Exxon Mobil Corp. 22.70%

  2. Chevron Corp. 21.29%

  3. EOG Resources Inc. 4.89%

  4. ConocoPhillips 4.49%

  5. Schlumberger Ltd. 4.37%

From the above list, it is obvious that the combination of Exxon Mobil + Chevron will move the ETF and currently both have been performing very well. Some highlights from the Exxon Mobil earnings report which was published at the beginning of February include:

  • Generates $48 billion of cash flow from operating activities, the highest level since 2012, more than covering capital investments, debt reduction, and dividend

  • Reduces structural costs by an additional $1.9 billion, increasing total savings to nearly $5 billion versus 2019

  • Strengthens balance sheet to pre-pandemic levels by paying down $20 billion in debt

Exxon Mobil has broken clear of the descending trend line that had capped prices since the highs of 2014.

Chevron's Q4 earnings report was also bullish as it stated:

  • Fourth-quarter earnings of $5.1 billion & annual earnings of $15.6 billion

  • Strong cash flow from operations of $29.2 billion in 2021

  • Record free cash flow of $21.1 billion in 2021

  • Dividends and share repurchase of $11.6 billion in 2021

During the craziest period in oil trading history when the futures contracts went negative, the technical for Chevron worked out to the tick as prices rebounded off the Andrews Pitchfork median line. Chevron’s price action has just moved into new all-time highs and the bull run is set to continue.

Looking at the Commitment of Traders chart for Oil futures it is notable that the Commercial Producers haven’t increased their short position since January. This suggests that they are happy with the amount of hedging they have on and will lock in higher prices at a later date.

The producers like Exxon Mobil and Chevron will keep pumping oil and reaping the benefits of the higher prices until supply outweighs demand. It’s in their interest to get as much out of the ground as possible before the likes of Iran get their oil to market.

This makes the hedging activity of the producers a key signal for the direction of the oil markets.

Currently, XLE is trading just above 69.00 with some clear breakout levels to act as support just below 60.00. The weekly 20, 50, and 200-period EMAs are rising and the 50 crossing the 200 this week should encourage more trend-following activity next week.

As we come towards the end of the coldest weeks of winter in the Northern Hemisphere and into spring, there is going to be a lull in the demand for oil and gas, etc. At least until the traditional US driving season in the summer months. Refineries will go into maintenance mode as supply will potentially exceed demand during this period.

If we do get a new surge of buying next week, I would look to the resistance levels around 76 and 85 as good targets to take profit and reassess the state of the energy complex.


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