A ‘little bit of juice left’ for Chevron and Exxon ahead of earnings, says market watcher

Wall Street's hopes are high for the energy sector this earnings season thanks to a recovery in oil so far this year. That hope should be validated Friday when industry leaders Chevron and Exxon Mobil are scheduled to report, says BK Asset Management's Boris Schlossberg.

"There's still a little bit of juice left in both plays because they've been such terrible laggards," Schlossberg, managing director of FX strategy, said Wednesday on CNBC's "Trading Nation."

Energy names have languished alongside crude in recent years as lower prices forced rig closures and ate into oil companies' profit and sales growth. A global supply glut and weaker demand sent oil prices spiraling in late 2014, dropping to a low near $26 a barrel in February 2016.

Since oil's multiyear low then, prices have risen nearly 150 percent. Over the same period, the S&P 500 has climbed 54 percent. Meanwhile, the XLE Energy ETF has gained 39 percent and Exxon Mobil 10 percent. Chevron was one of the better performers in the ETF with a 51 percent rise.

This year's gains should support earnings growth for the energy sector. Oil prices have been on the mend so far this year thanks largely to declining inventories and higher demand. Prices surged 7 percent in January, their best monthly gain since April 2016 and their best start to the year since 2006.

Continued weakness in the dollar should also support a further recovery in crude, says Schlossberg. The greenback closed January with its worst monthly loss in nearly two years. Domestic crude tends to get a boost from a weaker dollar as it becomes cheaper to foreign buyers.

"The dollar has tremendous amount of weakness ahead of it," said Schlossberg. "That means oil still stays at these levels and, more importantly, if we have this global synchronized economic growth it really is very supportive for oil staying at around $60, maybe even up to $70."

But, a rise to $70 is not without its challenges. High domestic production has led to another build in U.S. inventories. Domestic oil production rose to 10.03 million barrels in November, bypassing the 10-million-barrel marker it had not reached since 1970.

Production growth in the U.S., Canada and Brazil is expected to rise this year, according to International Energy Agency estimates. Output increases among those three countries undoes some of the good from a production limit deal among OPEC and other oil producers extended through the end of 2018.

Todd Gordon, founder of TradingAnalysis.com, is not as bullish on the energy sector heading into Friday's earnings reports, particularly as oil flounders around its $64 to $65 area of resistance.

"We're seeing some hesitation up here in the crude oil market," said Gordon in an appearance on "Trading Nation." "I think this overall market is extended. I think crude is extended. I think the dollar might be bottoming here a little bit."

Oil held above to close at $66.14 a barrel last Friday, a level it had not settled above since December 2014.

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Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

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