On Friday, OPEC oil ministers decided to continue their market share strategy against U.S. shale producers by holding current production near their 30 million-barrel-per-day quota that has been in place since 2011, sending prices to fresh seven-year lows.
On Tuesday, West Texas Intermediate fell to touch $36.60 per barrel — a level not seen since early 2009.
As a result, energy stocks are getting hammered, with the Energy SPDR (XLE) falling to reach lows not seen since late September, down nearly 17% from their early November high.
That’s why I’ve recommended a new put option position in Chevron Corporation (CVX) to Edge Pro subscribers. Specifically, I’m recommending the December $86 puts, which give the right to sell Chevron stock at $86 with expectation that prices will fall below that level in the days to come.
CVX Stock Chart
The pressure on energy stocks like CVX should continue as long as crude oil prices are under pressure. And that pressure looks set to continue as long as OPEC maintains its price war strategy.
While U.S. drilling rig counts have fallen, U.S. shale producers have refocused on low-cost/high-productivity wells to keep production high. Moreover, while OPEC’s official ceiling is around 30 million barrels per day, Oil Market Intelligence (OMI) reports that they actually produced at a near-record pace of 38.8 million in October while non-OPEC producers pumped a record 57.2 million.
With manufacturing activity slowing globally and here at home — the ISM manufacturing activity index indicates activity is falling outright at its worst pace since June 2009 — the world is simply awash in too much oil.
With prices so low, global oil revenue is collapsing, down 56% from last year’s peak according to Yardeni Research: from a $3.8 trillion annual rate to $1.7 trillion. That pressure will continue to weigh on the earnings of energy companies like Chevron which reported a 37% year-over-year drop in revenues back in October.
Based on where the CVX puts are trading, I’m looking for a quick double on a drop to $83 as shares fall down and out of a three-month topping pattern after hitting resistance at its 200-day moving average.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.
