By Nigam Arora
Donald Trump, in his presidential campaign, made no secret that he liked oil and gas over renewable sources of energy such as solar and wind.
As president, Trump has done everything to help the oil and gas industry. His first foreign visit was to Saudi Arabia, the world’s biggest oil exporter. Now he has withdrawn from the Paris accord for climate control. I have received a number of questions from investors interested in oil and gas stocks. They are asking why the price of oil fell after Trump announced that the United States was exiting from the Paris accord. To most investors, this is good for oil, and oil prices should have risen. Let’s explore the answer by first looking at a chart.
Please click here for the short-term chart of crude oil futures Similar action can be seen in the popular oil ETF /zigman2/quotes/203483736/lastsale USO -0.47% . The action is pronounced in popular leveraged crude oil ETFs /zigman2/quotes/206212566/lastsale UWT -3.79% and /zigman2/quotes/207496113/lastsale DWT -0.14% . Please note the following from the chart:
• The chart shows the point where Trump announced the withdrawal from the Paris accord.
• Oil futures fell immediately after the announcement.
• During the decline, the VUD indicator was orange, as shown on the chart. The VUD indicator is the most sensitive measure of supply and demand in real time. Orange indicates net selling, and green indicates net buying.
• The amplitude of the VUD indicator to the downside after the announcement was small. This indicates that the net selling was not aggressive.
• The chart shows that prior to the announcement, there were two failed technical breakouts. The VUD indicator shows that net buying was aggressive prior to the first breakout, and net buying continued even after the first breakout failed, leading to the second breakout.
• The foregoing conclusions of the VUD indicator are supported by anecdotal evidence of gurus making bullish statements on oil and their followers buying oil after OPEC reached a production-cut agreement.
• The chart also shows the Arora call to take profits on long oil positions just prior to the OPEC agreement and most gurus turning bullish. This long oil position was entered at the previous swing low. Time has shown that the call to take profits on long oil position was spot on. This is also an example of how often being in the minority makes money while following the majority often causes losses.
This also illustrates how simply buying technical breakouts without sophistication often results in losses.
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The reason for the perverse reaction
On the surface, oil’s reaction to Trump’s withdrawal from the Paris accord seems perverse. After all, if alternate-energy sources such as solar and wind are discouraged, oil and gas should rise. Digging deeper, a conclusion is readily found: Shale producers are indeed encouraged by Trump’s withdrawal from the Paris accord.
What do shale producers do when they feel encouraged? They produce more oil. The higher the production of oil, the lower the price. The “smart money” knows that markets often discount future events well in advance. Anticipating increased production by shale producers, the smart money sold oil.
Oil stocks and ETFs likely to benefit
More oil and gas production means a higher need for oil and gas services. Four ETFs that may benefit are Vectors Oil Services /zigman2/quotes/207596637/lastsale OIH +2.81% , SPDR S&P Oil & Gas Equipment & Services /zigman2/quotes/203361461/lastsale XES +2.62% , iShares U.S. Oil Equipment & Services ETF /zigman2/quotes/206923360/lastsale IEZ +0.51% , PowerShares Dynamic Oil & Gas Services Portfolio .
Individual stocks that may benefit include Schlumberger /zigman2/quotes/201012972/lastsale SLB +1.58% , Halliburton /zigman2/quotes/210488727/lastsale HAL +7.54% , Baker Hughes , National Oilwell Varco /zigman2/quotes/208758290/lastsale NOV +4.57% , U.S. Silica /zigman2/quotes/206361964/lastsale SLCA +9.09% , Emerge Energy Services , Hi-Crush Partners and Fairmount Santrol Holdings .
For those looking for income, Royal Dutch Shell /zigman2/quotes/207682964/lastsale RDS.B +4.05% , currently provides about a 7% dividend. To learn more about Royal Dutch Shell, please see “This environmentally friendly oil super major yields 6.85%.”