We are starting off a short week for the markets.
Oftentimes, on short weeks like this one, people take time away with the family with the thought that there’s not going to be any real action to trade.
Well, that’s not the case this week, as there is a trade developing in the market that you NEED to know about.
Not just because it can make you money, but not being aware of the changes developing in the energy sector is also going to cost you at the pump…
If you didn’t see, this was the headline that flashed on my phone this past weekend:
The Organization of Oil Exporting Countries (OPEC) is cutting more than 1 million barrels of oil production per day…
To put that into perspective, it is reducing the daily output of oil by the same number of barrels that my state – Ohio – uses in twice that time.
Oil, a.k.a. black gold, has been trending lower for the past five months due to several factors that adjust the global demand.
Now there are analysts saying this could cause a $10 jump in the price per barrel because of this new and artificially lowered supply.
But think back, the last time we saw OPEC cut oil production was in 2020 AFTER the pandemic had taken a toll on the economy.
It was a direct response to lowered demand.
But now, it’s not a stay-at-home order lowering demand, it’s the market.
Every time you even mention the word recession, it’ll begin to put pressure on the demand for oil. At that point, the average person begins to brace for impact and save so they can ride out the recessionary storm.
That’s exactly what OPEC is doing by reducing oil production. But because it’s not the everyman doing it, rather the big, scary oil Barron, we call it “preventative maintenance.”
And that’s really what all this comes down to, the question on all of our minds for the better part of a year: Recession, or no recession?
And depending on who you listen to, you might get a few different answers.
In our Money Morning universe, most of us look to Garrett for macroeconomic insights, and he of course has been dropping the hint that we are either already in, or right on the edge, of a recession.
OPEC knows this – globally, we are seeing a slowdown in the demand for oil.
Now, OPEC was not officially supposed to meet until the summer for choices like this, but they are choosing to get out in front of it and take control of the price of oil before they take a hit.
This is where the similarities to 2020 end. Back then, they were responding to the drop in demand. Now, they are planning for it.
For what it’s worth if the Fed had made this move a year-plus ago, maybe none of this would be happening in the first place.
The initial response in the United States Oil Fund ETF (USO) and other oil contracts was an immediate rally of 5-8%:
This is the monthly chart on USO, and as you can see, for the past five months we have been bouncing off the 20-month moving average, resisting dropping into a bear market.
This announcement saves USO for another month as the sector hits its stride… for now… The trend has still been decidedly negative since May.
Of course, it makes sense that the sector would rally in the wake of this announcement. Lower overhead and higher prices on account of the decreased supply. It’s a win-win for everybody involved – except you, of course…
This is transparently artificial, but that doesn’t mean you can’t make a profit from it.
Give this a few days for the traders to have their fun and everything will even out – then the real investment will make itself clear.
Currently, I’m trading it using the Marathon Petroleum Corporation (MPC) calls I gave you guys a week or so ago:
Taking a look at the chart, it’s not ripping higher like the rest of the sector, but that’s because it started sooner, so it’s going to be a softer move just by the nature of how things trade.
We didn’t need a move higher in the wake of the announcement because we are already up 35.6%.
And it’s a great example of luck preferring the prepared trader.
But if you are looking to trade the OPEC decision to cut production, there are two stocks I’m watching on a short-term basis:
Occidental Petroleum Corporation (OXY): This company just broke both its 200-day moving average and its top Bollinger Band, making it a bullish marvel of technical analysis.
On top of that, this is Uncle Warren Buffet’s problem child. People who model their portfolios after his are starting to give up, but this could be a driver to take a dive back into the stock.
Look to trade this stock to a $70 target price.
Chevron Corporation (CVX): Another technical masterpiece, this stock broke the 50- and 200-day moving average lines in the same day.
When this happens, you typically see the move amplified by a factor of three-to-six times.
That’s a bullish signal if I’ve ever seen one.
With the multitude of bullish indicators coming from this stock, you could see this company make quick work of a move to a target price of $180.
And of course, I’ll be tracking this story with my Night Traders and giving updates as needed on the Long & Short of It as things develop.
Enjoy the rest of your night, our week is already 25% over!
April 03 2023