The Keystone Pipeline, an oil pipeline linking the US and Canada measures a length of 2,687 miles. Often viewed as the most contentious environmental hazard in the US, permits for construction of the Keystone Pipeline were revoked by President Biden, as the US moves boldly to re-join the Paris Climate Accord vis-a-vis emissions targets.
It was proposed by TC Energy Corporation in 2008, and the Government of Alberta. The pipeline was never functional, but it was meant to pump 500,000 bpd between Canada and the US Gulf Coast. Environmentalists were up in arms about the pipeline, fearing oil spills, and the extensive greenhouse gas emissions which would be taking place from Canada’s oil sands.
As one of his signature ‘election’ promises, Biden wasted no time revoking further permits for the construction of the Keystone XL Pipeline, effectively rendering it dead on arrival. The decision will certainly impact the energy industry in a big way. For one thing, the US will be shifting its focus from North America to foreign oil once again.
By re-joining the Paris Climate Agreement, and seeking to impose strict limitations on emissions, the US will now have to comply with prohibitive greenhouse gas emissions, as a signatory of the accord.
Proponents of fossil fuels were put on notice by Biden’s decision, and the long-term impact on the oil industry is perceived as bearish. Initially oil stocks actually rallied ahead on the inauguration day, but that rapidly changed as the gravity of Biden’s decision hit home.
All That Glitters Is Not Gold
An indication of bearish sentiment is often found in demand for other commodities like gold. One of the largest gold ETFs – SPDR Gold shares (GLD) – performed marginally better in the days since Biden’s inauguration, but not enough to warrant much interest. Heading into the final week of January, the gold price forecast is lagging across Asia, on the back of stronger U.S. Treasury yields, but ably assisted by a weaker USD.
Massive stimulus will keep the price of gold in check, as greater spending is likely to buoy the US economy. Stop-loss orders on gold are evident as traders consider the impact of a massive stimulus on their gold holdings. If the economy continues rumbling along with $1400 checks later this year, gold will have a hard time taking off.
Stocks Traders and Oil Futures
Source: OilPrice.com WTI Crude Oil Futures
An indication of market sentiment can be seen with speculative activity in WTI crude oil. The CME Group, NYMEX WTI crude oil futures & options is a useful barometer of sentiment vis-a-vis oil prices. The price of WTI crude oil on Friday 22 January, 2021 was $52.35, down 1.47%, or $0.78. The perception is that speculators are bearish on oil stocks with stock order types like stop-loss orders as they take profit to the downside.
Futures markets for crude oil throughout 2021, and beyond are indicate lower pricing and lower volumes moving forward. Oil price futures figures indicate a bearish trend, as evidenced by the SPDR Select Sector Fund – Energy Select Sector (XLE) pictured below.
Source: NASDAQ.com SPDR Select Sector Fund – Energy Select Sector (XLE)
The fund rallied markedly after November 2020, moving from around $28 all the way up to $44 in January, before dropping a $1.5 between January 20, and January 2021. Indeed, the sector laggards on Friday 22 January, were the energy services sector. They dropped 0.9%, leading large part by companies like Halliburton Company (HAL), and Devon Energy Corporation (DVM).
These stocks dropped 3.0% and 3.1% respectively. Energy Exchange Traded Funds, noteworthy among them XLE (pictured above) was also down 0.8%. Indeed, the decision to pivot away from the Keystone XL Pipeline is reverberating throughout the US oil industry, including multinational conglomerates such as BP, Exxon Mobil, and Shell Oil.
- The price of BP (NYSE: BP) stock is down over the past 5 days, currently trading under $24 per share.
Source: Google Stock Price BP (NYSE: BP)
- The price of Exxon Mobil Corp (NYSE: XOM) stock is down over the past 5 days, currently trading at $47.45 per share
Source: Google stock price XOM (NYSE: XOM)
- The price of Royal Dutch Shell plc (ADR Class A) stock is down over the past 5 days, currently trading at $39.18 per share
Source: Google stock price RDS.A (NYSE: RDS.A)
Stock Orders Trigger Selling Frenzy with Oil Stocks
True to form, the US oil industry was plagued by problems well ahead of the November elections. The US shale oil industry faced tremendous pressure in the form of declining demand for crude in the wake of the pandemic. By the end of 2020, some 45 North American oil & natural gas companies filed for bankruptcy, according to Haynes and Boone law firm.
Retail and institutional traders alike, initiated market orders and limit orders on oil company stocks. As news of Biden’s executive order vis-a-vis the Keystone XL Pipeline filtered through the markets, jittery traders weren’t prepared to stick around and wait for their energy stocks portfolios to be whittled away. Evidence of this is seen in the technical indicators. The Ichimoku Cloud for BP Amoco PLC [pictured below] reveals bearish sentiment, and a declining 200-day moving average price.
Source: StockCharts BP
Indeed, analysts have given BP a short-term bearish performance outlook, as the stock is most multiple earnings forecasts over the past 1 year. The lag effect of the pandemic is crushing the oil industry, and a move away from fossil fuels towards alternative energies will likely be the final nail. While the Keystone XL Pipeline decision is unlikely to hamper US dependence on crude oil, when combined with the Paris Accords, and a push towards green energy, it is safe to assume that stock orders for crude oil stocks and ETFs will face downward pressure.
Investors with multi-sector equities in their portfolios will be carefully watching energy stocks and be prepared to take profit, likely by shorting oil stocks accordingly.