Energy Stocks Outperforming Crude Oil

NEW YORK ( TheStreet) -- The dynamics for energy stocks vs. Nymex crude oil are different than those for gold stocks vs. Comex gold. On Monday, I discussed how Gold Stocks Continue to Lag Gold vs. their 200-day simple moving averages, as gold stocks were below their 200-day SMAs despite the breakout for gold above its 200-day SMA.

Here, I discuss how energy stocks have been leading Nymex crude oil by trading above their 200-day simple moving averages, while crude oil has not yet made that solid breakout.

In the first half of 2012, my forecast for Nymex crude oil called for a test of my first-half semiannual value level at $79.83 per barrel. Even with crude oil as high as $110.55 on March 1, I predicted that oil would not be able to sustain gains above my annual pivot at $103.58. Crude oil first tested $79.83 on June 21st. By June 29, the first half ended and $79.83 became a memory.

On June 27, I wrote Oil-Service Stocks Now Look Cheap and showed that the Oils-Energy sector was 19.0% undervalued according to www.ValuEngine.com with the oil and gas field services industry 32.0% undervalued. In this post, I profiled five oil services stocks that were Buy-rated, according to ValuEngine.

On August 1, I wrote Trading the Undervalued Energy Sector I profiled the 45 stocks in the Energy Select Sector SPDR Fund ( XLE) which includes the five oil services stocks recommended on June 27. Each of these stocks remained Buy-rated.

Since August 1, Nymex crude oil rallied from $88.91 to a high of $98.29 on August 23. The daily chart below shows that crude oil has been trading back and forth around its 200-day simple moving average at $96.61, and is on the cusp of that level again this morning.

Given the tug-of-war between the anticipation of a third round of Quantitative Easing and the slowing global economy, weakness in crude oil needs to hold my monthly value level at $93.30. If the FOMC announces QE3 on Thursday afternoon and oil clears its 200-day simple moving average, the upside is a potential return to my annual pivot at $103.58.

Tuesday, ValuEngine shows the oils-energy trading right around fair value at 0.5% overvalued with the oil and gas field services industry undervalued by 8.2%.

Here is today's profile of the five energy stocks that I originally profiled on June 27.


Chart Courtesy of Thomson/Reuters

Reading the Table

OV/UN Valued: The stocks with a red number are undervalued by this percentage. Those with a black number are overvalued by that percentage according to ValuEngine.

VE Rating: A "1-Engine" rating is a Strong Sell, a "2-Engine" rating is a Sell, a "3-Engine" rating is a Hold, a "4-Engine" rating is a Buy and a "5-Engine" rating is a Strong Buy.

Last 12-Month Return (%): Stocks with a red number declined by that percentage over the last 12 months. Stocks with a black number increased by that percentage.

Forecast 1-Year Return: All stocks with a red number are projected to decline by that percentage over the next 12 months. Stocks with a black number in the table are projected to move higher by that percentage over the next 12 months.

Value Level: The price at which to enter a GTC Limit Order to buy on weakness. The letters mean; W-Weekly, M-Monthly, Q-Quarterly, S-Semiannual and A- Annual.

Pivot: A level between a value level and risky level that should be a magnet during the time frame noted.

Risky Level: is the price at which to enter a GTC Limit Order to sell on strength.

Baker Hughes ( BHI) ($46.65 vs $38.26 on 06/27) continues to have a Buy rating, a reasonable P/E ratio, and is above its 200-day SMA at $45.49.

Diamond Offshore ( DO) ($67.41 vs $56.61 on 06/27) still has a Buy rating, a reasonable P/E ratio and has been above its 200-day SMA at $63.23 since July 13th.

Nabors Industries ( NBR) ($15.35 vs $12.79 on 06/27) still has a Buy rating, a low P/E ratio and is below its 200-day SMA at $16.49.

National Oilwell ( NOV) ($81.02 vs $60.90 on 06/27) still has a Buy rating, a reasonable P/E ratio and has been above its 200-day SMA at $73.68 since July 26th.

Schlumberger ( SLB) ($72.69 vs $59.67 on 06/27) still has a Buy rating, with an elevated P/E ratio and has been above its 200-day SMA at $70.90 since July 26.

In sum, the price of crude oil remains in a tug-of-war between commodity speculation in anticipation of QE3, and weak demand due to the global economic slowdown with crude oil on the cusp of its 200-day simple moving average at $96.61.

If QE3 is implemented oil should distance itself above the 200-day SMA with energy stocks continuing to the upside. Without QE3 the focus should return to a weakening economy, and the oil stocks above their 200-day SMAs are likely to decline toward those key supports.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Richard Suttmeier has an engineering degree from Georgia Tech and a master of science from Brooklyn Poly. He began his career in the financial services industry in 1972 trading U.S. Treasury securities in the primary dealer community. In 1981 he formed the Government Bond Department at LF Rothschild and helped establish that firm as a primary dealer in 1986. Richard began writing market research in 1984 and held positions as market strategist at firms such as Smith Barney, William R Hough, Joseph Stevens, and Rightside Advisors. He joined www.ValuEngine.com in 2008 producing newsletters covering the U.S. capital markets, and a universe of more than 7,000 stocks. Richard employs a "buy and trade" investment strategy and can be reached at RSuttmeier@Gmail.com.