How a Trump Tweet Can Spark an Oil Breakout
There’s no shortage of distractions in this market.
But some of the recent conflict is starting to spill over into our turf. As tensions rise in the Middle East due to the chemical attack in Syria and an attempted missile strike on Saudi Arabia’s capital, commodity prices are starting to pop.
Some pros even feel that they are becoming more reliant on this rapid-fire news cycle…
“As analysts who deal primarily with supply and demand, we feel uneasy at present because the fundamental data are dominated by politics,” a Commerzbank report explains, via MarketWatch. “The current abundance of (bullish) news is forcing us into the unfamiliar role of a political observer.”
Politics isn’t our beat here at the Rude. But it’s tough to argue with these analysts. Just look at oil. The price of a barrel of crude jumped to three-year highs yesterday as Trump tweeted out threats of retaliation to Syria.
At the very beginning of the year, we noted how the financial media were blaming oil’s recent rebound on protests in Iran and tightening inventories. While these two factors certainly added fuel to the energy rally, the sparks that ignited oil’s comeback showed up in the market months earlier.
An impressive four-month comeback had already shot crude to gains of more than 30% by early January. Toward the very end of the third quarter, oil topped $50 a barrel for the first time since May 2017. As oil-related stocks posted their strongest trading week of the year, we took our cue to rotate into the sector.
The September oil comeback had turned into the catalyst for a new energy rally. When we compared the energy sector’s late 2017 run to the S&P 500, it wasn’t even close. The Energy Select Sector SPDR (NYSE:XLE) jumped more than 20% during the final four months of the year. The S&P was up a little more than 10% over the same timeframe. After correcting alongside the stock market in February, oil is once again beginning to outperform the averages.
Of course, no one wanted anything to do with oil stocks for most of 2017. Crude was slumping to new 52-week lows as recently as June, threatening to tumble into a new bear market. The energy sector was faring even worse as oil continued to slide.
Look how quickly the narrative has changed. Nine months ago, talking heads were discussing the end of oil. Now that the market is proving the status quo wrong, we’re seeing a burgeoning turnaround play mature into a new bull market.
You already had the chance to grab onto the Energy Select Sector SPDR as it snapped its 2017 downtrend. This week’s action in the energy sector is now offering up yet another shot at booking double-digit gains from the raging oil bull.
We also hopped onboard the oil services sector in January with our VanEck Vectors Oil Services ETF (NYSE:OIH) play. At the time, the comeback in oil services was accelerating. We were looking for a quick run into the $30 range. But the first quarter correction had other plans. After a quick reset, this play is back near breakeven for us and headed in the right direction.
The days of $100 oil are long gone. But as the energy comeback unfolds, we can “thank” a messy geopolitical picture for adding fuel to the rally’s fire.