Will Slaughter
Fixed-Income Portfolio Manager at Protective Life
Energy stocks should be sold now that everyone sees scarcity as far as the eye can see, just as they were a buy when people saw a glut as recently as December. Per Bloomberg, Iran is prepared to let Japanese-related ships through the Strait of Hormuz. If Japanese, Chinese, Indian and possibly Korean vessels can transit, the closure becomes a non-issue, since Gulf oil buyers are mainly in Asia and Saudi Arabia and Iraq can divert 7-10 million barrels a day by pipeline to others. x.com x.com x.comÂ
Occidental Petroleum's reputation was wrecked by former CEO Vicki Hollub, and it has not been worth buying at any point in the past six years. The Anadarko acquisition came at peak 2019 oil prices and was far too large; Berkshire's 8% cumulative perpetual preferred deal helped avoid a shareholder vote. Occidental went from an A-rated balance sheet to about three years of junk status, losing 18 years of dividend increases. Buy-and-hold oil and gas only offers alpha 2-3 times a decade. x.com x.comÂ
Oil-related stocks will be hit hard over the coming months and the next year, so it is way too early to buy them. Only later, in the next cycle, will oil-related stocks, including oil service names, do very well. A follower summarizing the call describes oil falling first, then rising toward 500 in the following cycle. x.com x.comÂ
US energy stocks are being steadily accumulated after a 17-year base, and that base will not resolve in a month. The sector broke out this year and pulled back on contracting volume, which is digestion, not distribution. Energy trades near 13x earnings versus about 20x for hyperscalers. Stocks now rise with oil and get bought back when oil falls. Tech is priced for the cost of capital to come down; energy for the reason it will not. x.com x.com x.comÂ
Accumulating macro headwinds have sharply raised Nasdaq 100 risk, so protect the portfolio. The bull market looks near its end rather than its beginning, although the timing of the top remains uncertain. x.comÂ
US equities look vulnerable to a significant correction before another sustainable rally: 3.4% inflation, roughly $100 Brent, a 5.2% 10-year yield and just 29K new September jobs contrast with fresh index highs, while the Magnificent 7 make up 34.9% of the S&P 500. Strong AI earnings expectations and liquidity could keep shares elevated longer than expected. x.comÂ
US energy stocks could rerate if energy prices stay elevated, because S&P 500 index holders have effectively been short energy for a decade. Per the quoted post, the equal-weight S&P 500 has fallen against the cap-weighted index for ten years and this year hit its lowest level, below even the 2020 panic low. x.comÂ
Exxon Mobil and Chevron are among the highest-quality energy stocks and are long-term holdings, so a quarterly earnings decline is just noise while the thesis is intact. In cyclicals like energy, the approach is to buy only at the deepest cycle lows, never chase, and hold until the thesis permanently breaks. x.comÂ
The oil trade is over because crude can no longer make higher highs, even with Middle East crude exports back near their peaks. Oil is trading around its average price of the last eight months and set a lower high in September, so it is only a matter of time before the market gives up. Crude looks about to fall through the floor, with rates following and high-beta stocks then going vertical as every dip gets bought. x.com x.com x.comÂ
US energy stocks still make sense in a portfolio for the longer-term macro regime. The timing for their next move is not there yet. x.comÂ
High-yield bonds are losing momentum and look to be forming a failed move higher. Once markets panic, these bonds tend to get crushed as investors switch from seeking yield to seeking safety. x.comÂ