Is there still a bull case to made in energy stocks given that domestic oil stock piles continue to rise? This is the main the question on the minds of energy investors. But with multiple data points suggesting lower oil prices in the near term, investors who have placed bets for oil to reach $60 to $80 per barrel in 2017 should re-think their strategy.
Crude oil prices fell again on Wednesday, leading to a third straight day of declines in the Dow Jones Industrial Average — the index’s first three-day losing streak since January. West Texas Intermediate crude closed down 5.4% to $50.28 per barrel on Wednesday. Not only does this mark is lowest level in three months, the 5.4% decline is its largest one-day drop in more than a year.
The reason? The Energy Information Administration on Wednesday reported U.S. inventories stockpiles added 8.2 million barrels of crude in the past week. Notably, the measure amounts to four times what analysts expected. Meanwhile, commercial stockpiles climbed to 528.4 million barrels, marking an all-time high.
"The rising crude inventory levels in the U.S. to new all-time highs has been the number one reason why prices have been unable to move further higher after OPEC had agreed with some non-OPEC members to limit production back in November," said Fawad Razaqzada, technical analyst at FOREX.com.
Meanwhile, the report spooked investors, causing a selloff in the Energy Select Sector SPDR ETF (XLE), which declined almost 3%. Prominent energy players such as Exxon Mobil (XOM), Chevron (CVX) declined 1.8% and 1.97%, respectively, while Royal Dutch Shell (RDS.A) was one of the largest energy companies hit, losing 2.72%.
Is the selloff an overreaction or should investors see this as a buying opportunity? That’s not an easy question to answer given that oil is now on the verge of breaking below the key psychological level of $50 per barrel — a level that has also served as a key technical support area for traders. The thinking is, should oil prices fall below $50, what’s to stop it from falling to, say, $48 or $45?
Oil prices at $45 per barrel could equate to $3 to 5$ per share decline in either Exxon or Chevron. And with inventories rising for a ninth straight reporting period, the notions that a bull case can still be made is tough to advocate, especially when U.S. oil production continue to rise.