Two huge energy stocks are surging, but the sector is not out of the woods, warns one portfolio manager

Energy stocks just posted their best week in two months, but growing headwinds could threaten the rally, warns one long-time portfolio manager.

"We're neutral on energy currently but we think on the intermediate and long term there are headwinds," Washington Crossing Advisors' Chad Morganlander said Friday on CNBC's "Trading Nation."

One of energy's main threats is escalating U.S. production levels. Output is increasing at such a pace that Morganlander estimates the U.S. could become the largest producer in the world, overtaking Russia, within three years.

The U.S. is expected to account for almost 60 percent of growth in oil and energy supplies over the next five years, according to an annual report from the International Energy Agency last week. A separate industry watchdog, the Energy Information Administration, expects U.S. crude production to average 10.7 million barrels a day this year, beating the record 9.6 million set in 1970.

Surging supply could soon be met by falling demand, and that would be a toxic combination, Morganlander warned.

"We think there will be a global slowdown in the next two to three years so this could have a destabilizing effect on the demand curve for energy," Morganlander said.

Chris Verrone, head of technical analysis at Strategas Research Partners, says the group as a whole is still challenging, but that a few names could be worth the risk.

"We need to own leaders when it's a tough group, and energy is still a tough group," Verrone told "Trading Nation." His two picks, Chevron and Halliburton, are the second- and eighth-largest U.S. energy companies, respectively, by market cap.

Verrone said Chevron shares could head toward the mid-$120s after holding its important $110 level. The California-based oil company fell below its 50-day moving average in late January and its 200-day moving average in early February. On Friday, its shares regained a level above the 200-day.

Halliburton has held more closely to key support levels. Its stock slipped below its 50-day moving average in early February but has held above its 200-day. Verrone says that after keeping above its $45 support level, the next hurdle to clear will be $48 to $49.

"Ultimately both these names do have some upside," said Verrone.

Chevron and Halliburton ended the week with strong gains. On Friday, Chevron added 3 percent while Halliburton increased 2 percent. The S&P 500 ended 1.7 percent higher.

Both have had a weak start to the year, though, dragged on by a sell-off in the broader energy sector in February. Chevron has fallen 6 percent in 2018, while Halliburton is down 4 percent. The Energy XLE ETF has dropped 5 percent as the S&P 500 has risen 4 percent.

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.

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.

Follow Michael Santoli on Twitter @michaelsantoli

Read more

Connect