3 Reasons Why Oil Will Be Lower for Longer

01/11/2016 9:38 am EST

Focus: GLOBAL

Michael Berger

President & Founder, Technical420.com

Although energy stocks look attractive from a historical perspective, there are no near-term catalysts in sight. However, Michael Berger, of Technical420.com, does expect to see energy stocks rally once the technical selling pressure is over and lists the companies he expects to outperform the market on a longer-term basis.

While the oil and gas price environment has continued to deteriorate, hedge funds that cut their bullish bets on oil have continued to profit. Data from the United States Commodity Futures Trading Commission (CFTC) shows a 24% decrease in the number of net-long positions in West Texas Intermediate during the week that ended on January 5. The number of long positions (bets on prices increasing) fell by 2.5%, while short positions (bets on prices decreasing) increased by 11%.

According to CFTC data, net-long positions declined by 23,863 contracts to 76,934 futures and options, the lowest level since July 2010. This comes after the price of West Texas Intermediate fell more than 12% last week as volatility in Chinese markets fueled a global sell-off.

Sell-off Driven by Three Factors

Although China has played a role in this sell-off, it has been driven by fundamental macroeconomic concerns, technical selling, and a strengthening dollar. When it comes to the fundamental macroeconomic environment, investor concerns relate to the overall uncertainty of oil prices. Specifically, if and when oil prices rebound in 2016.

When it comes to the technical aspect of this sell-off, oil prices sank in late December and we attribute this to tax-loss selling as investors looked to offset gains in other sectors. Also, fund redemptions at dedicated MLP funds have increased the selling pressure and the sector has been viewed as a short target for hedge funds (who have cut their bullish price bets to the lowest level since 2010).

As countries around the world continue to devalue its currency, the United States dollar continues to strengthen. According to analysts at Morgan Stanley (MS), a stronger dollar will not help the price of oil recover. MS said that a rapid appreciation of the dollar may send Brent crude as low as $20 a barrel.

Valuations Are Attractive but No Near-term Catalysts

Although energy stocks look attractive from a historical perspective, there are no near-term catalysts in sight. We expect to see energy stocks rally once the technical selling pressure is over and are currently on the sidelines.

Some of the companies we expect to outperform the market on a longer-term basis are: Concho Resources (CXO), Halliburton Company (HAL), Pioneer Natural Resources Co. (PXD), Baker Hughes Incorporated (BHI), Apache Corp. (APA), Diamondback Energy, Inc. (FANG), and Continental Resources, Inc. (CLR).

Michael Berger, Founder and President, Technical420.com

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