×

The energy sector has tumbled 16 percent this year — is it time to buy?

More pain is ahead for this year's worst-performing sector, according to strategists who see oil prices dragging energy stocks even lower.

With crude near $47 after starting off the year above $54, Stephen Schork, founder and editor of The Schork Report, says the commodity will not get back above $50 per barrel anytime soon.

"Certainly, the fundamentals are pointing toward lower oil prices. Crude oil bulls have a significant problem here. The market is range bound, but we came into the summer with prices already falling. Now the issue here is demand for crude oil has never been stronger," Schork said Tuesday on CNBC's "Trading Nation."

Specifically, Schork cited demand from U.S. oil refineries in the last four months. Ten of the past 16 weeks have reflected the highest demand for crude that Schork has seen by U.S. refineries, yet he pointed out that oil bulls continue to "suffer" as crude remains below $50 per barrel.

This is mostly because production is still high, a pattern that will likely continue. As the summer winds down and "driving season" ends, Schork said, "refinery maintenance season" will begin and refineries' demand will likely slow into the autumn months. Between now and Halloween, he said, oil demand in the U.S. will likely decline by between 800,000 and 1.3 million barrels per day. This would theoretically depress oil prices further.

WTI crude dropped into negative territory in Wednesday trading, after initially rising earlier in the session, as the Energy Information Administration reported U.S. oil production rose to 9.5 million barrels per day last week. The energy sector was the only negative sector in the session (and one of two negative for the year, along with telecommunications). The crude contract for September was trading at $47.32 per barrel.

Options market activity indicates that traders are looking to buy oil around $40 per barrel and sell it at $50, said Stacey Gilbert, head of derivatives strategy at Susquehanna. This activity has been in place for much of this year, Gilbert said, and will continue to be a theme going forward.

"We occasionally see the buyers on the pullback, but it's just not there for long enough," Gilbert said on "Trading Nation," adding that the energy sector continues to be "unloved."

However, this makes a popular energy-tracking ETF, the XLE, an interesting contrarian play, she said. The fund hit a 16-month low on Monday as a top holding in the fund, Exxon Mobil, fell to 18-month lows.

Some individual energy names still have decent dividend yields, Gilbert said, and have changed their behavior based on this year's fluctuation in oil prices. Bullish call options on the XLE could be attractive at this point, Gilbert said, given the opportunity for sentiment to shift.

Still, it will be difficult for energy stocks to stage a significant rally if oil continues to slump.

Vote
Vote to see results
Total Votes:

Not a Scientific Survey. Results may not total 100% due to rounding.

Videos

Trades to Watch

Trader Bios

About

Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Brian Sullivan

Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

Read more

Connect