To The Moon

🌟🌟🌟Oil prices rallied almost 3% to their highest level in 3 months on Friday as the markets brace for supply disruptions due to the broadest US sanctions package which targets Russian oil and gas revenue.

The outgoing Biden administration threw the proverbial kitchen sink at Russia's energy sector on Friday with a sweeping slate of sanctions meant to curtail Moscow's still resilient energy earnings and potentially weaken its war making power in a critical year for Ukraine's survival.

The latest moves include sanctions on 2 Russian oil majors, Gazprom Neft and Surgutneftegas as well as more than 180 fleet tankers, natural gas producers, energy traders and oil field service  providers.  It is the most significant sanctions on Russia's energy sector.

What is the implication of this latest move on oil prices?

With the latest sanctions on Russia, the bottom line is higher oil and gas prices.  Brent crude futures is up 3.7% at USD 79.76 a barrel while US West Texas Intermediate crude futures rose by 3.6% to settle at USD 76.57 per barrel, both at a 3 months high.  These sanctions will severely disrupt Russian oil exports to its major buyers India and China.

Oil prices were also buoyed as extreme cold in the US and Europe has lifted demand for heating oil.  According to JPMorgan analysts, there will be a significant year over year increase in global oil demand of 1.6 million barrels a day in the first quarter of 2025, primarily boosted by demand for heating oil, kerosene and LPG. 

$Energy Select Sector SPDR Fund(XLE)$  XLE tracks a market cap weighted index of US energy companies in the S&P500.  This means a concentrated exposure to the US Oil Giants in just 1 powerful ETF.

The Top 10 holdings include Exxon Mobil, Chevron Corporation, Conoco Phillips, Williams Companies, EOG Resources, ONEOK Inc, Schlumberger Ltd, Kinder Morgan, Phillips 66, Marathon Petroleum and Baker Hughes.

The Top 10 holdings weightage is 74%.  Total number of holdings is 24.  The expense ratio is a 0.09%, the lowest among competing ETFs.  Dividends are paid every 3 months.  The current dividend yield is 3.27%.  The next dividend is due in March 2025.

$Exxon Mobil(XOM)$  is US largest oil and gas company.  In 2024, Exxon has completed its USD 60 billion acquisition of its smaller US rival Pioneer Natural Resources, consolidating its position as the largest shale producer .  Exxon expects to grow its oil production in the Permian shale basin to over 2 million barrels per day.

Exxon is also a Dividend Aristocrat, having paid continuing increasing dividends for over 42 years.  Exxon reported Q3 24 Earnings of USD 8.6 billion and has doubled its earnings since 2019, driven by cost reductions, strategic investments and optimised operations.

Exxon has streamlined its refinery portfolio, prioritising high value sites and improved its production capability.  Exxon is the top holding of XLE with 22.7%  weightage. 

$Chevron(CVX)$  is US second largest oil company that operates in over 180 countries.  In 2023 Chevron produced about 3.1 million barrels of oil and gas per day, with 43% of that production coming from the US.  Chevron had a strong 2024 with record production, strong earnings and cash returns to its shareholders.  

For Q3 2024, Chevron reported profits totalling USD 4.5 billion or USD 2.48 per share due to year over year increase in worldwide production.  Chevron also set a quarterly record in the Permian Basin, producing 900,000 barrels  of oil per day. 

Chevron takes up 15% of XLE weightage. 

Conoco Phillips $ConocoPhillips(COP)$ is the 3rd largest oil company in the US with operations in 15 countries including US, Norway, Canada, Australia, Indonesia, Malaysia and many more. 

Conoco Phillips had a good 2024 with strong production, earnings and cash flow.   It reported USD 2.1 billion in earnings or USD 1.76 per share.  It also plans to increase its dividends by 34% to USD 0.78 per share in Q4 24.  Conoco Phillips takes up 8% weightage in XLE. 

These are just the Top 3 US Oil Giants that make up the holdings of XLE.  

President Elect Donald Trump has appointed oil company executive Chris Wright as his secretary of energy.  Chris Wright is one of the most vocal supporters of fracking oil and natural gas and says that the world is not transitioning from fossil fuels.  

US already produces more than 13 million tons of oil a day.    With Donald Trump in power whose slogan is  "Drill Baby Drill", he will reduce regulations and make it easier for oil companies to drill on federal lands. 

All these factors will certainly benefit XLE ETF which has  been a laggard in 2024.    XLE has only risen 8% in 2024, underperforming $SPDR S&P 500 ETF Trust(SPY)$  which rose 21%.

Wall Street Analysts are bullish on XLE with a Buy rating, Average Target price of USD 104.82, according to 20 analysts surveyed by Tipranks. This is an upside potential of 18%.  

I have bought XLE just before the Ukraine war in February 2022 and since then it has grown slow and steadily.  I believe that with the new incoming Trump administration, XLE will continue on its upward trajectory in 2025 and beyond. 

Investing is not a sprint but a marathon.  It is time in the market that counts, not timing the market for me. 

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