A New Look at the Chaotic Energy Sector

The energy markets have grown infinitely more complicated in the last 18 months. Contrast this period with the massive rally that began in 2003. Back then, everything went up with crude oil, including explorers, refiners and service stocks. Even lowly natural gas found a strong bid in all the excitement, lifting the forgotten fuel to an all-time high.

The broad sector has turned into a crazy quilt of winners and losers these days. The tug and pull between commodities, equities and currencies has yielded a chaotic mix of price patterns that predict a broad variety of outcomes through 2008. Nowhere is this sibling conflict more potent than with the refining stocks.

Valero Energy

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Source: eSignal

Valero Energy (VLO - commentary - Cramer's Take) stood out as a top gun in the energy sector during its powerful rally run between 2003 and 2007. The refiner peaked at 78.68 last July after nosing above 12-month resistance, and then rolled over into a moderate decline that expanded into a series of ugly down waves.

The stock bounced at two-year lows about a week ago, but selling pressure has now returned after the company lowered 2008 earnings estimates well below analyst expectations. Short-sellers are licking their chops here because a breakdown at major support near 45 will issue a strong sell signal.

Refining stocks, as a group, have underperformed crude oil by a wide margin for the last nine months. Notably, the trouble began at exactly the same time that crude rallied into the upper 70s and began its historic run up to "round number" 100. It's just mindboggling how these stocks have been unable to profit from skyrocketing fuel prices.

Crude oil is priced in U.S. dollars. The collapse of the greenback has triggered all sorts of arbitrage plays that have forced crude higher with each uptick in the euro. Of course, this relationship has been in force through the entire energy rally, but it's taken on new fury since the euro/dollar broke over 1.50.

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At the time of publication, Farley had no positions in the stocks mentioned, although holdings can change at any time.

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