In a previous post, Sweet $XLE Setup, I provided a potential setup that was developing on the $XLE (SPDRs Select Sector Energy ETF). This post is a follow-up which I think you may find intriguing.
Please refer to the chart below (which has only been updated with price bars – original notes remain):
As you can see, the retest of the recent high around $69 has failed (so far), and it appears it may easily roll over from here.
I will be entering a short position on $XLE if it trades below $66, and I will use a stop loss in the $67.6-ish area. You can see from the chart my price target is the somewhere in the $57’s by the end of July.
ConocoPhillips will have to cut their dividend, there’s no if’s and but’s about it. If you have any faith in their management, you have to believe they would not chose to take on MORE debt just to pay out $3.6 Billion over the next year.
I understand CFO Jeff Sheets declared recently that the company’s “top priority is the dividend.” Those are the type of statements that make me cringe as an investor! Think about it, some “experts” believe that half the oil and gas industry may go bankrupt. If I’m a long term investor of COP, I want the company’s ongoing viability to be the CFO’s top priority.
COP has an earnings announcement on Feb. 4, 2016. Given the extraordinary circumstances playing out in the energy markets, I think it’s reasonable for them to back down on this issue. Who would blame them?
Expect a dividend cut.
So Here’s the Trade:
I told you in a recent post that the $42 level was key, depending on how the overall market bounces.
Well, equities bounced yesterday and COP rallied up near the $42 level ($41.82 is close enough for me), see the chart below:
That is a 30 minute chart. The grey line is the $42 level. The arrows are my numerous maneuverings (red = adding to shorts, green = skimming off profits).
Bottom Line: if you want some short energy exposure – COP is the play as long as it is sub-$42.
Saudi Arabia is playing chess while everyone else is sitting at home watching reality TV and occasionally playing with themselves. The Saudi Oil Minister Ali Al-Naimi is kicking your ass and you probably didn’t even know it – until right now. Here’s how he’s done it so far:
Step 1: Accumulate a horde of US Dollars.
Step 2: Show the World who’s really in control of the oil market. His words in December 2014:
We want to tell the world that high-efficiency producing countries are the ones that deserve market share.
Step 4: Sell back US Dollars… wait whut!? – Yep, that was a hedge. Remember, they’re playing chess. Meanwhile, guys like Harold Hamm scrap their hedges.
Step 5: “Shut them Haters Up”
Sorry I had to. You should play that in the background while you read the rest; the Grandmaster of Oil is willing to go full Gangsta!
There’s a lot of “Haters” out there. They believe Saudi Arabia is having huge budgetary issues and that they’ll soon have to give-in and forego this effort to bankrupt the rest of the worlds oil production. The Grandmaster of Oil told us in the interview I referenced above that it doesn’t matter!!
The interviewer asked him, almost pleadingly, “But you have announced that you will have a budgetary deficit?”
His response:
A deficit will occur…. We have no debt. We can go to the banks. They are full. We can go and borrow money, and keep our reserves. Or we can use some of our reserves.
Go to the banks huh? How would they do that? What would that look like?
Well now we know. It looks like this: Open the Saudi Arabian stock market up to foreign investors (see here), then IPO the biggest company on the planet (see here). That’s Gangsta!
Bottom line, they won’t stop until there are mass casualties – they can’t stop – the future of their kingdom depends on it. Now that hopefully you finally realize the non-Saudi petroleum producers are screwed…
Here’s the Trade:
Stay Short ConocoPhillips (COP).
I already gave you this one back in early November 2015, see my post Commodity Not-So Super Cycle. It remains my favorite energy short, reason being simply because they haven’t cut their dividend yet (as I discussed in the article).
Here’s the chart, the red arrow points to where I handed you free money. The green line was my original price target ($42):
Depending on when equities bounce this week (if they bounce), I think COP either blows right through $42, or bounces off of it. Use the $42 level as resistance or support whichever the case. For example, if we blow through $42, short it again once it bounces back to that level. Conversely, if we bounce and COP is near $42, wait for it run – once this cold fish gets tired of running, re-short it. It’ll be well below $42 once they cut that dividend!
