Crude oil drops to historic lows — how to trade energy stocks

It was a historic day on oil markets.

West Texas Intermediate crude for May delivery, a contract expiring Tuesday, fell more than 300% to negative $37.63. It was the first time that crude oil had fallen below zero. Oil has been crushed by Covid-19 disruptions and a price war between Saudi Arabia and Russia.

Energy stocks were also hit hard on Monday with the XLE energy ETF falling by 3%. Ari Wald, head of technical analysis at Oppenheimer, says while the drop wasn’t as steep for energy stocks, the group did reach its own historic low.

“The sector overall [is] really far from bullish. In fact, the energy sector [is] coming off its lowest level since 1931 versus the S&P. That’s a 90-year relative low. So while some stabilization will be both reasonable and welcome, we see more attractive opportunities for funds elsewhere and stay away,” Wald said on CNBC’s “Trading Nation” on Monday.

Wald says it makes sense to either avoid the energy sector or sell on any strength.

One group of investors could see opportunity here, though, says Boris Schlossberg, managing director of FX strategy at BK Asset Management.

“If you’re a value investor, this is actually the kind of scenario you actually want. Energy was 70% of the S&P at the height when oil was around $100 a barrel. Now it’s only 3% of the S&P. It’s a perfect mean reversion trade,” Schlossberg said during the same segment.

Value investors face stocks that trade at a “cheap” valuation relative to the market — this is commonly measured by their price-to-earnings ratios.

“Overall, on a long-term basis, I think the easiest play is to simply buy the biggest players in the space — perhaps Exxon and Royal Dutch Shell — because they have the strongest balance sheet, because ultimately what’s going to happen is you’re going to have massive consolidation, they’re going to be able to buy assets incredibly cheap,” said Schlossberg.

Exxon Mobil and Royal Dutch Shell are down 41% and 43% year to date, respectively. The XLE ETF is down 45% year to date.

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