I hate being the bearer of bad news…
But the energy sector is giving off an ominous signal right now.
Now, before I go on, I get that this isn’t the consensus view. In fact, our paid publications include several energy recommendations that are still doing well.
After all, the energy sector is one of the only things working in the markets this year…
The Energy Select Sector SPDR Fund (XLE) has absolutely soared. It’s up roughly 48% in 2022.
That’s huge.
And it’s especially impressive when you consider that the broad market S&P 500 Index is still down around 18% this year.
So I get the temptation to keep betting on energy stocks.
But as investors, we also need to realize that the market won’t follow the same pattern forever. And as I’ll show you today, some major changes are underway in this space.
Plus, you might not have noticed yet, but oil prices are already falling. And the downtrend doesn’t appear to be over yet.
So sure, I might be calling it early. But folks… the tides of the energy market are turning.
Let’s take a closer look together…
You might not be feeling as much relief at the gas pump as you’d like.
But as I said, the reality is that oil prices have been dropping since June. And Western governments, like the so-called G7, want them to fall even further…
That’s because oil is one of Russia’s primary sources of revenue. And the country is using
that oil money to fund its war in Ukraine.
So the G7 is doing just about everything it can to bring the cost of oil down.
And it’s working. Here’s the price chart of West Texas Intermediate crude oil this year…
As you can see, oil prices are down more than 40% since June. And now, the G7 has enacted its strongest measure yet…
I’m talking about a “price cap.”
The price cap is pretty easy to understand. In short, going forward, all the G7 countries and allies like Australia have agreed to pay no more than $60 per barrel for Russian oil.
But importantly, that doesn’t mean every country has agreed to this price cap.
Specifically, China is ignoring the sanctions.
However, as Reuters reported last week, Chinese buyers are getting oil at a discount of roughly $6 per barrel. So even though the country’s refiners could ultimately pay prices that exceed the price cap, this uncertainty is putting more downward pressure on oil prices.
Where does all that leave energy investors?
Put simply, energy investors are in a precarious position…
The White House has publicly stated that it plans to repurchase oil for our country’s Strategic Petroleum Reserve. And it expects to do that between $67 and $72 per barrel.
Oil is currently trading around that level. So in the short term, it could act as “support.”
But remember, China just responded to the price cap that Western nations like the U.S. recently imposed on Russian oil. And put simply, the world’s largest country isn’t listening.
The Power Gauge is quietly shifting its outlook on the energy sector, too…
Last week, the system is flipped to “neutral+” on XLE. And under the hood, we can see
why…
None of the 23 rated stocks within the exchange-traded fund earns a “bullish” or better
rating from the Power Gauge today. And XLE just dropped below its long-term trendline.
Now, like I said, I might be calling this turning point early.
However, today’s volatile market requires caution…
We don’t need to throw in the towel just yet. But we should watch the energy sector closely.
That’s true even if it remains the best-performing sector of 2022.
Good investing,
Pete Carmasino
