Energy Stocks Can Make a Comeback. Oil Is Down but Not Out.

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The price of oil has added to concern about inflation.

David Paul Morris/Bloomberg

The price of oil has tumbled, but the pain could soon subside. That would lift oil stocks. 

At its low point of just over $75 a barrel on Monday morning, the price of West Texas Intermediate crude oil was down by a touch over 10%—a plunge market watchers define as a correction—from its level in late October. That peak of $84.65 was the highest since the fourth quarter of 2014.

Two factors are behind the slide. First, the governments of some of the key oil-consuming countries are taking action to rein in the cost of fuel, given concerns about inflation. President Joe Biden spoke recently with Chinese President Xi Jinping about coordinating the release of oil from both nation’s strategic reserves, after which Chinese authorities said they were preparing to move.

It isn’t clear whether the U.S. will release reserves as well, but according to Reuters, Japan and India are working toward doing so in response to a request from Biden.

The recent surge in Covid-19 cases in Europe is weighing on expectations for demand as well.  

Despite that, though, the worst may be over for oil bulls. There seems to be no shortage of willing buyers around $74 a barrel, given that the price hasn’t fallen below that level since it began makingnew 2021 highs in September. Monday morning, the price was hovering near $75 after falling hard on Friday.

“This is where oil should start to stabilize, between $74 and $75,” said John Kolovos, chief technical strategist at Macro Risk Advisors. 

Others agree. “Oil should stabilize as the bulls step in to defend key technical support in the mid $70s for WTI,” wrote Tom Essaye, founder of Sevens Report Research. 

All that bodes well for oil stocks, which have traded similarly to the price of the commodity. As of its closing level on Friday, the Energy Select Sector SPDR exchange-traded fund (ticker: XLE) was down 8% from the 2021 high of $59.14 a share.

Higher oil prices are, of course, a major driver of profits for producers. And with the price of oil showing signs of life Monday, the oil stock ETF was up just over 2%.

“At some point, this weakness in energy and energy-related stocks is going to be an opportunity,” Kolovos said. A rebound in oil stocks to their recent highs would bring investors a return of almost 6% from the current level. Just watch to see if oil falls below $74. That would indicate whoever has been buying at that level may have turned more bearish.