What's that signpost on the road ahead? You're entering ... the danger zone. Oil and natural gas prices are rebounding and quarterly results from several big-name companies have exceeded expectations, two overriding factors that have been driving markets higher. But as we'll explain below, risks are lurking around the corner that could send energy prices plunging again.
On Friday, West Texas Intermediate crude, the U.S. benchmark, rose 55 cents, or 1.3%, to settle at $43.73 a barrel. Brent North Sea crude, the international benchmark, gained 58 cents, or 1.3%, to settle at $45.11 a barrel.
Crude's movement toward $50/bbl has sparked a fire under the broader markets and once-beleaguered energy stocks. Rather than hunkering down into safe harbors, increasingly optimistic investors are choosing growth opportunities that hitherto seemed too risky.
Southwestern Energy (SWN) - Get Southwestern Energy Company Report posted the biggest gain in the S&P 500 on Friday, soaring 15%. Chesapeake Energy (CHK) - Get Chesapeake Energy Corporation Report , which has been fending off bankruptcy rumors, jumped 5.8%.
The S&P 500 (SPY) - Get SPDR S&P 500 ETF Trust Report is up 2.50% year to date, despite recent declines among Wall Street darlings in the technology sector. Alphabet (GOOG) - Get Alphabet Inc. Class C Report and Microsoft (MSFT) - Get Microsoft Corporation (MSFT) Report released disappointing earnings results last week, sending their shares lower.
The energy sector once weighed on the broader market; it now underpins it. But the role reversal may be short lived, if earnings reports this week from energy companies (and the banks that hold their debt) live up to analysts' low expectations. And if impending economic data prove lackluster, it would be a double whammy on a market that's already punishing formerly robust sectors such as technology.
The debacle at Doha last week, at which squabbling OPEC members couldn't agree to a production freeze, will probably turn out to be a moot point. A de facto freeze already is unfolding in North America.
Scores of shale producers that recklessly borrowed to boost production during the boom years are trying to avoid insolvency. Even those still operating have scant capital to invest in maintaining production. This week, new data will indicate whether investors will continue to favor energy stocks or pivot to safer moneymaking opportunities.
Our advice: Keep your powder dry until you see the major scorecards. Many companies this quarter have defied expectations, which only fuels the uncertainty.
The salient earnings announcements to watch in the week ahead:
Monday: Express Scripts (ESRX) , First Bancorp (FBP) - Get First Bancorp Report , NBT Bancorp (NBTB) - Get NBT Bancorp Inc. Report , Healthcare Trust of America (HTA) - Get Healthcare Trust of America, Inc. Class A Report . Tuesday: Barrick Gold (ABX) , Baxter (BAX) - Get Baxter International Inc. Report , BP (BP) - Get BP p.l.c. Sponsored ADR Report , Freeport-McMoRan (FCX) - Get Freeport-McMoRan, Inc. (FCX) Report , Lockheed Martin (LMT) - Get Lockheed Martin Corporation (LMT) Report , Whirlpool (WHR) - Get Whirlpool Corporation (WHR) Report , Tenneco (TEN) - Get Tenneco Inc. Class A Report , Wyndham Worldwide (WYN) . Wednesday: Baker Hughes (BHI) , Avery Dennison (AVY) - Get Avery Dennison Corporation Report , General Dynamics (GD) - Get General Dynamics Corporation (GD) Report , Goodyear Tire (GT) - Get Goodyear Tire & Rubber Company Report , Mondelez International (MDLZ) - Get Mondelez International, Inc. Class A (MDLZ) Report , Northrop Grumman (NOC) - Get Northrop Grumman Corporation Report . Thursday: AbbVie (ABBV) - Get AbbVie, Inc. Report , Aetna (AET) , Bristol-Meyers (BMY) - Get Bristol-Myers Squibb Company Report , Colgate-Palmolive (CL) - Get Colgate-Palmolive Company Report , Dow Chemical (DOW) - Get Dow, Inc. Report , Dunkin Brands (DNKN) - Get Dunkin' Brands Group, Inc. Report , Ford Motor (F) - Get Ford Motor Company Report , Gilead Sciences (GILD) - Get Gilead Sciences, Inc. (GILD) Report , Raytheon (RTN) - Get Raytheon Company Report . Friday: Chevron (CVX) - Get Chevron Corporation Report , Exxon Mobil (XOM) - Get Exxon Mobil Corporation Report , Phillips 66 (PSX) - Get Phillips 66 Report , Cabot Oil & Gas (COG) - Get Cabot Oil & Gas Corporation Report .
Major reports this week on the economic calendar:
Monday: New Home Sales. Tuesday: Durable Goods Orders, S&P Case-Shiller HPI, Consumer Confidence. Wednesday: MBA Mortgage Applications, Pending Home Sales Index, EIA Petroleum Status Report. Thursday: Jobless Claims, Bloomberg Consumer Comfort Index, PMI Services Flash, EIA Natural Gas Report. Friday: Consumer Sentiment, Baker Hughes Rig Count.
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John Persinos is editorial manager and investment analyst at Investing Daily. At the time of publication, the author held no positions in the stocks mentioned.