A Short-Lived Correction in Oil and Gas

Happy new year!

This is the first Weekly Wire of the new year, and commodity markets started the year off with a bang. I’m talking specifically about energy, which is on a roller coaster right now.

First, oil prices hit an 18-month high yesterday. That was because OPEC members Oman and Kuwait announced cuts in compliance with the agreement they worked out to lower production.

Then, later that day, prices headed lower, dragged down by a tumble in the price of natural gas. The U.S. benchmark natural gas price shed about 10% of its value on Tuesday. That’s a huge move. And it comes less than a week after natural gas prices hit a two-year high!

What happened? Forecasters at Commodity Weather Group put out a report that the arctic weather gripping much of the nation would probably fade sooner rather than later.

“We continue to watch the complete collapse of this briefly colder pattern starting as early as early next week,” the report said.

Frankly, the price action in natural gas is what you might expect if we suddenly found out we were never going to use it again. That means this correction is nearer to the end than the beginning.

The fact is that we’re using plenty of natural gas. America’s stored natural gas plummeted by 237 billion cubic feet in one recent week. This put stockpiles below last year’s levels and below the five-year average.

The blue line is this year’s storage level. You can see it was drawn down rapidly at the end of 2016.

Why are we using so much? Because natural gas is 45% of all U.S. power capacity. From 2008 to 2015, utilities added 72,000 megawatts (MW) of new natural gas power capacity, along with 56,000 MW of wind power.

There are about 23,000 MW of gas power capacity now under construction, which is half of the U.S. total. Natural gas is the fuel of the future for the U.S.

And there is “something new” about natural gas. The U.S. is now a net natural gas exporter. We hit that milestone in November. The rise in natural gas exports is mainly due to rising exports through pipelines to Mexico.

Finally, U.S. natural gas production is projected to rise this year after falling last year. And exports are projected to rise as well.

So I think this sell-off in natural gas is overdone.

Sharp Correction Is Short-Lived

One stock that got slammed in the action yesterday was Cabot Oil & Gas (NYSE: COG). The open gain on Cabot was cut in half in just one day’s red letter trading.

You can see how Cabot fell hard. On the bright side, it’s not falling as hard as natural gas. Also, it’s near support.

And there is good news about Cabot Oil & Gas that was lost in Tuesday’s sell-off. The Federal Energy Regulatory Commission issued its final Environmental Impact Statement on the Atlantic Sunrise pipeline project. This is one of the final steps needed before construction. Construction should start in mid-2018.

Atlantic Sunrise will be a huge transit corridor for Cabot’s natural gas. And in addition to the 850,000 million British thermal units (MMBtu) previously announced for the pipeline, Cabot just announced another deal for an additional 150,000 million MMBtu.

Yeah, completion is still a ways down the road, but I think investors can see daylight.

Just to be safe, we’ll raise your protective stop on Cabot Oil & Gas a bit more. It’s currently at $20.70. Raise it to $21.20. If Cabot closes below support at $21.39, we want to be out.

Action to Take: Cancel and replace your close-only protective stop on Cabot Oil & Gas (NYSE: COG). New stop: $21.20.

 

That’s above your entry price, and you should have collected a small dividend to boot.

Our Portfolio Is a Fortress of Strength

Again, I think this sell-off in natural gas is overdone.

And when it comes to yesterday’s drop in oil prices, traders are simply nervous and quick to take profits.

And yet our oil positions are looking great. The SPDR S&P Oil & Gas Equipment & Services ETF (NYSE: XES) shrugged off the bad news like a 350-pound running back throwing off a tackle. Devon Energy Corp. (NYSE: DVN) was off its highs for the day but still up. The same held true for Occidental Petroleum Corp. (NYSE: OXY).

The pipeline companies are looking good, too. TransMontaigne Partners (NYSE: TLP), Sunoco Logistics (NYSE: SXL) and TransCanada Corp. (NYSE: TRP) not only look strong, but also pay terrific dividends.

The bottom line is you are invested in the best stocks in the energy space. These are companies that can do well in the rough patches as well as the good times. I think 2017 is going to be great for these companies.

If we do get a short-term sell-off in energy, that will be an opportunity to add new positions on the cheap… because this thirsty ol’ world is using more and more oil and gas all the time. And a shift in winter weather won’t change that.

Good investing,

Sean

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