In this earnings cycle, the energy sector will take a big turn on the catwalk as market participants assess profitability in the commodities sector.
The price of crude oil has been dictating the direction of global equities for some time now because some of the largest companies in the S&P 500 are oil stocks. This quarter's earnings in the energy sector may dictate whether that continues.
Currently, oil is trading around $40/barrel and the S&P 500 is trading at (or near) its highest levels of the year.
The question is whether energy companies with revenues tied to the price of oil have felt operational relief through the recent rebound. And if not immediate relief, at least an improved earnings outlook for the remainder of 2016 and into 2017.
Given that so many companies are hanging by a thread in the industry, this earnings cycle may also draw the line between those that will make it through the energy crisis in one piece, and those that will not.
Obviously, the ongoing health of companies in the energy sector depends on sustained higher oil prices (not just a couple weeks of relief). However, for those companies that expect material improvement in profitability under higher assumptions for oil prices, there could be a quick upward spike in underlying share price.
For publicly-traded entities on the cusp of financial disaster - especially those that haven't felt any benefit from higher prices - the writing on the wall could be affixed in permanent marker after this quarter’s earnings. That development could equate to new 52-week lows for the bottom-tier stocks in this group.
Importantly, earnings is only one piece of the energy pie in April.
Another important event was a meeting including most of the world's biggest oil producing countries in Doha. Oil prices rebounded from the mid-twenties to the high-thirties for reasons largely attributable to “oil production freeze" sound bytes from this cartel.
If the group fails to sign off on a tangible agreement at the meeting, then oil prices could crumble once again - making the potential for increased volatility across the energy sector in the near-term even greater.
If volatility does materialize, the opportunity to add to existing positions or establish new positions may present itself.
For example, if you are already bullish a stock like DVN, strong earnings/guidance announced by that company in combination with good news out of Doha may be reason for increased conviction.
If you are bearish a particular stock that's clinging to life in the energy sector, weak earnings/guidance from that entity and a lack of consensus in Doha may also be reason for increased conviction (albeit in a different direction than the previous example).
If you need some symbols to monitor in the sector during the upcoming month, consider XOM, PXD, APA, DVN, WLL, OAS, ECA and DNR - a group with reasonably liquid options that offers a diverse snapshot in terms of market capitalization, outlook, and quality.
If you have any questions on the energy sector and the upcoming earnings cycle, please don't hesitate to reach out at firstname.lastname@example.org.
Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.