CRUDE OIL PRICES HIT CONTRACT HIGHS WHICH GIVES A BOOST TO ENERGY SHARES -- ENERGY SHARES HAVE BEEN 2014 LEADERS, BUT STILL LOOK CHEAP -- CHEVRON BOUNCES OFF CHART SUPPORT -- OCCIDENTIAL PETROLEUM NEARS BREAKOUT
BRENT AND LIGHT CRUDE OIL FUTURES HIT NEW HIGHS... A government report showing a big drop in oil inventories last week has pushed oil prices to new highs. Chart 1 shows July Light Crude Oil closing climbing 1.74 today to trade at a new contract high near 1.04. Chart 2 shows July Brent Crude Oil hitting a new closing high as well. Those two upside breakouts gave a boost to energy shares which were one of the day's biggest gainers.
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Chart 1
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Chart 2
RISING CRUDE HELPS ENERGY PERFFORMANCE... Chart 3 shows how rising crude prices help the performance of the energy sector. During February, July crude rose above its high from last August and turned the trend of crude higher. The gray area plots a relative strength ratio of the Energy SPDR (XLE) divided by the S&P 500. The ratio tends to underperform when crude is weak (like the first half of 2013 and the period from last October to this January). Notice that the February breakout in crude coincided with the start of a strong upturn in energy sector performance (black arrow). The recent upturn in crude is having the same effect.
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Chart 3
ENERGY SHARES ARE STILL CHEAP... Relatively weak energy prices since 2011 have caused energy shares to underperform the rest of the market -- until this year. Chart 4 shows the XLE/SPX relative strength ratio trending lower from early 2011 until mid-2012. After rising into the start of 2013, the ratio fell again into the first quarter of this year. After a successful retest of its 2012 low, the energy/S&P ratio has surged this year to the highest level in more than a year. That was due largely to a higher price of oil. Two things jump out from Chart 4. The first is that the relative performance of the energy sector appears to have bottomed and is trending higher. The second is that energy shares are still cheap relative to the rest of the market.
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Chart 4
CHEVRON AND OXY HAVE PROMISING CHART PATTERNS... A number of large stocks in the oil patch have already hit record or multi-year highs. One of them is Chevron. Chart 5 shows Chevron (CVX) retesting its breakout point near 123 that was exceeded during April. Its relative strength ratio (above chart) has been climbing as well. Chart 6 shows Occidental Petroleum (OXY) very close to breaking through overhead resistance near 98. Its relative strength line (above chart) appears to be turning up as well. A new high would put OXY at the highest level in two years. Large oil stocks that have hit new record highs include Anadarko Petroleum (APX) ConocoPhillips (COP), Exxon Mobil (XOM), ConocoPhillips (COP), and Halliburton (HAL).
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Chart 5
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Chart 6
SCHLUMBERGER IS TESTING OLD HIGH... The weekly bars in Chart 7 show Schlumberger (SLB) nearing a test of its 2007/2008 highs. Its relative strength line (above chart) has risen to the highest level in two years. SLB has one of the strongest energy stocks so far this year with a gain of 13% (nearly double the XLE gain of 7%). The SPX has risen 2% during that period.
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Chart 7
OIL SERVICE ETF NEARS 2011 HIGH... While the Energy SPDR (XLE) has already hit an all-time high (top of Chart 8), the Market Vectors Oil Services ETF (OIH) is still testing its 2011 high. A close above its 2011 high, however, would constitute a major bullish breakout. That would make the OIH an even cheaper way to participate in the energy recovery. One of the factors favoring an upside breakout is the fact that Schlumberger (shown in Chart 7) is the biggest holding in the OIH (20%).
