Energy: ‘There’s a lot of longs’ ahead of China’s re-opening plans, analyst says
Blue Line Futures President Bill Baruch joins Yahoo Finance Live to weigh in on U.S. gas prices, what to expect from the energy sector in 2023, and the effects of China reopening on oil markets.
Video Transcript
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JARED BLIKRE: Gasoline prices continue to decline across the nation, falling for a fifth consecutive week. The national gas price average currently stands at $3.26 a gallon. And for more on the energy sector, let's bring in Bill Baruch, Blue Line Futures President. And, Bill, always good to see you here. We can get into the nitty gritty weeds of the futures market in a little bit. But first, your comment on these declining gas prices, which we kind of saw up until now, and also coming off the election. But they're here, and they are resonating in the public's mind.
BILL BARUCH: You're right. I mean, there's been a bit more tepid demand than the market was really prepared for. We've seen really this price action come down in the $2 gasoline futures and retest that level when it was Omicron breaking in November, Thanksgiving of last year. So this is a pretty big-- pretty big level. I think there's a lot of support down here, and we're actually getting excited at this.
But if you look at jet fuel inventory levels, sort of in line with historical averages. That's something relative to all the travel. You're seeing the numbers there. It's showing-- more alludes to tepid demand. Crack spreads have come in. And then also, I think overall, there's a lot of sentiment taking this further as some liquidation comes into the market when it hit some levels.
SEANA SMITH: So, Bill, I guess it sounds like this is presenting a pretty good buying opportunity, at least from your perspective.
BILL BARUCH: Yeah. Yeah, we've looked at it as a buying opportunity. I was joking around in interviews I've done in recent weeks and months that I've probably done as little in the energy space as I have done the last-- probably my whole career. I have sort of just been patient, and patience was really going to bring opportunity. And now we're seeing crude oil WTI contract get to $70. There's a lot of support down there on a technical basis, but also on a psychological basis. You don't want to see it break and close below 70.
But-- so futures portfolios that were trading very actively, I'm getting long in some call spreads in the February contract, 77 and a half, $81 call spreads. They're under $1. I think there's some pretty good upside there on a good rebound. We're also buying OXY in securities portfolios. I think there's really tremendous value. It's a great trading vehicle we've used for much of the year.
JARED BLIKRE: I wanted to ask you that there had been a bit of a discrepancy between XLE-- that's the S&P 500 energy sector-- the way that was trading and the way crude oil was trading. And not that they're always supposed to be in lockstep, but energy final-- energy stocks finally came down a bit to meet crude oil prices, which has declined. And then taking your thesis that energy prices, at least WTI above $70, is constructively bullish, anything besides OXY? Are you liking the sector as a whole? What other energy stocks would you be thinking about buying here?
BILL BARUCH: Yeah, we're very bullish in the sector as a whole. We've had between 15% and 20% exposure in the energy stocks, in those portfolios this year. We dialed back in a couple of recent weeks, kind of fearful in the crack spreads. So Phillips 66 is one that we had stepped out of. Kind of rolling back, I think, a little more of a high beta play in OXY here.
But historical averages, if you look at the relative-- XLE relative to crude oil, I mean, it was beaten down over the past, really, 18 months. And this is a rebound back towards the more historical mean. So I think this is something to keep in mind. You know, overall, broadly, crude oil is an area-- $50 to $70 I'd like to just broadly think as, you know, vicious volatility can happen in between it. But there's good bull markets well out above 70, 80 area that can anchor, but vicious volatility between that. And then bear markets below that $50 benchmark.
So I think right now, if we hold 70, I remain very upbeat. But again, it's a very underinvested space. And these companies, they have tremendous free cash flow. Free cash flow yields like OXY, 12%, 13%. I mean, Exxon, 10%. Pioneer right around, I think, 10%. And, I mean, a lot of these companies, I mean, the cash flow is terrific. They've got themselves and their balance sheets into a really great spot here for the foreseeable future, given especially an underinvested industry. I remain very bullish.
SEANA SMITH: Bill, what about the biggest drivers of the price action that we've seen recently? Because I think a lot of traders heading into the month of December thought it was going to be a tough month when it comes to oil because of the Russian sanctions on-- the sanctions on Russian oil, excuse me, that were going into effect this month. But it simply looks like demand seems to be the number one driving factor. Is that true?
BILL BARUCH: Yeah, I think the demand is, like I said, a little weaker than one would expect. And you're seeing that with some of the crack spread movement, a bunch of different indicators that are out there. But I think broadly speaking, the headwind has been the SPR release. And I think that's going to become a more bullish factor as you look into next year.
The other factor, too, I think, again, this is a market-- the underlying crude oil prices, these global growth fears that really became very relevant last week. And they've been relevant for weeks prior as well. But I think last week really kind of started to get that-- people scared in just kind of a lot of the headlines. So I think a lot of liquidation really took place.
But the other side of that is the China reopening. And it's not something that's going to happen all at once. It's something that's going to happen sort of slowly, marginally through the first quarter of next year. And I think a lot of-- there's a lot of longs in the space that were sort of leaning on this China reopening. And the fact that we couldn't get out above $83 technical resistance, I think, just led to a lot of liquidations through last week. And then if you were patient enough and you weren't caught up in that windfall of price action, then the opportunity is here for you.
JARED BLIKRE: All right, real quick here, SPR refueling the Strategic Petroleum Reserve at $70 per barrel. Is that a floor? Is that something big? At least in my mind, I haven't heard of a floor in terms of US crude prices in some time. What does this mean to you?
BILL BARUCH: We haven't heard a lot of jawboning in recent sessions. But you go back a couple of weeks, OPEC Plus was clearly looking at $70 in WTI as an area of-- to lean against and jawbone, $80 in brent, roughly speaking, as an area that we would hear some jargon coming from. And if we don't see an uptick in global growth, we're likely to see potentially more production withheld in the coming meetings. And that's going to be a bullish factor.
There was a bit of keepaway, I think, that was being played because the White House said they were looking for $70 or below $70 to start replenishing that SPR. So I think a good response off the $70 level here today. There's definitely, I think, a great trade. But the incoming news, I mean, CPI tomorrow is going to be a big one.
And the Fed and the narrative that we get from the Fed and the rate hikes to come here in what would be a rate hike on Wednesday as well as coming in February, I think that's going to just be a good pulse on the risk-- the risk environment. You need to keep a pulse of the risk environment in order to really kind of trade this market and navigate. But for now, that's a really good response off $70. I think there's room to run. But again, it's going to be a very volatile week.
JARED BLIKRE: All right, got to leave it there. Bill Baruch, thank you, as always.
