# Bottom fishing in energy sector



## james4beach (Nov 15, 2012)

I should start by saying that I don't do this myself. My Canadian stock exposure is with a 5-pack that mimics the index, and I hold 20% weight in the TSX energy sector and have no immediate plans to deviate from this.

However, I'm curious about other approaches. The Canadian energy sector is clearly in a prolonged bear market. Is there anyone here who has started accumulating XEG?

I'm also thinking about call options on XEG (link). The Montreal Exchange has 2021 and 2022 expiry calls on XEG. I'm not an options expert by any means, but it makes me think about a recovery speculation with limited downside.


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## Rusty O'Toole (Feb 1, 2012)

Interesting thought. If you believe people will continue to use oil, and you believe in the 'buy low - sell high' theory of investing, and energy stocks are on the bargain counter, then this is where we should be shopping for bargains. Buy stock in well capitalized profit making companies and wait. Are there any good dividend payers you recommend.


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## doctrine (Sep 30, 2011)

I am accumulating energy as well. It is really, really cheap and priced like Canada won't be selling any oil in a few years. There are some scenarios which could see prices drop but many more than that would see a positive return. I expect most of the gains will be made in the next seasonal cycle (Dec 19 to Apr/May 20), which may coincide with a lot of positive industry (pipeline) news as well as enough time for monetary and fiscal stimulus to start kicking in. So likely buying a bit every month for the next 4-5 months.


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## humble_pie (Jun 7, 2009)

james4beach said:


> I should start by saying that I don't do this myself. My Canadian stock exposure is with a 5-pack that mimics the index, and I hold 20% weight in the TSX energy sector and have no immediate plans to deviate from this.
> 
> However, I'm curious about other approaches. The Canadian energy sector is clearly in a prolonged bear market. Is there anyone here who has started accumulating XEG?
> 
> I'm also thinking about call options on XEG (link). The Montreal Exchange has 2021 and 2022 expiry calls on XEG. I'm not an options expert by any means, but it makes me think about a recovery speculation with limited downside.



jas4 i wouldn't go for XEG options myself, too illiquid. Look at those 2021s & 22s, there are fairly big B/A spreads plus there's no open interest to speak of

it's true one can always try to play games with the montreal market makers - who are mostly in europe btw, they are not in canada at all - but i only do that when there are no other available choices.

instead i believe i'd go for optiions in XOM, a major US integrated oil that also, by its sheer size, represents a proxy slice of the north american energy sector.

speaking of sectors, drilling rigs are beaten down to an unbelievable price level. They are like the long ago days when canadian Teck sold in US market for $2 plus change.

i wouldn't say i'm one who is bullish on fossil fuel energy yet but, come to think of it, i did sell 4 puts in schlumberger the other day. Selling puts is often a bullish strategy. In the very short term this move has not done particularly well though (translation: wlll have to keep rolling over/stickhandling this short put position)


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## lonewolf :) (Sep 13, 2016)

APC Anadarko petroleum buy 27 Feb sell April 24 seasonal trade (never up dated recent data)

win 85%,
years 27, 
days 57,
avg profit 10%,
risk/reward 1:1.9, 
avg daily profit .17%, 
biggest profit 38%, 
max gain 52%, 
avg draw down 5%,
max draw 19%, 
total wins 23, 
total losses 4,
trading days 40, 
total history profit 268%,
optional yes


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## doctrine (Sep 30, 2011)

The only risk on XEG and Canadian energy is its technically really in the crapper. New 52 week lows, new all time lows, below all moving averages, from 10 day to 200 day. What is interesting is that fundamentally, however, the companies that make up XEG are profitable at current prices. And WTI oil price itself isn't breaking down technically. Sooner or later, XEG will turn up and then I think it will rebound 15-25% pretty quickly.


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## lonewolf :) (Sep 13, 2016)

Never played Montreal exchange just did not seem practical to play when the CBOE has so much more volume.

Options should be played different then stocks i.e., when buying stocks can buy on an up day. With options it is best to buy calls on a strong down day, 2nd best on a down day worst to buy calls on a strong up day.

For going long like to use deep in the money options with little to no premium sell @ least 6 months in advance of exploration.

Would divide money into 3 & not put all the money on the table @ one. When your method gives you clear buy signal put 1 third on table.

If I was going to play the energy sector would not touch it till mid January of this year. Long positions in stock from labor day to sometime in Jan would not play.


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## jerryhung (Mar 28, 2011)

I have enough BTE, MEG, PD all in deep red, it's hard to win when they go down without relationship with Crude/CL/WTI/Brent prices, and reach 10 year low's daily LOL
Crude is much higher than earlier years, yet stock prices still go down. Fundamentals don't matter

One day hopefully they'll turn, yes hope IS my strategy
Just glad I dumped CVE, VII at least to not lose on those


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## james4beach (Nov 15, 2012)

Thanks for sharing your ideas. Maybe XEG calls aren't a great idea, if there's no open interest in them as humble_pie points out.

I currently hold Suncor in my regular Canadian portfolio, and if I add more money to this portfolio, I'd expand to hold both Suncor & Enbridge for my energy sector. Not really stock picking here, these are just the largest energy components of the TSX index.

My current thinking is that I'll let my asset allocation sort this out. I have 20% equity weight in energy, and currently this has dropped down to 14%. If energy keeps falling, that will drop even lower. When I rebalance at the end of the year, I'll have to buy more energy stocks... the asset allocation should take care of "buy low" as I get myself back up to 20%.


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## peterk (May 16, 2010)

james4beach said:


> Thanks for sharing your ideas. Maybe XEG calls aren't a great idea, if there's no open interest in them as humble_pie points out.
> 
> I currently hold Suncor in my regular Canadian portfolio, and if I add more money to this portfolio, I'd expand to hold both Suncor & Enbridge for my energy sector. Not really stock picking here, these are just the largest energy components of the TSX index.
> 
> My current thinking is that I'll let my asset allocation sort this out. I have 20% equity weight in energy, and currently this has dropped down to 14%. If energy keeps falling, that will drop even lower. When I rebalance at the end of the year, I'll have to buy more energy stocks... the asset allocation should take care of "buy low" as I get myself back up to 20%.


That sounds totally like a good idea.

Myself I have a large, scattered energy sector portfolio of all sorts (including XEG), all of which are doing terribly

Though I've committed myself to buying only the big-boys now, and am mostly sticking to it. I've only added a little to SU, CNQ, XOM, ENB, IPL for the past year. 

I've also got 2 ITM XOM calls. Though now I'm getting into trouble as they are only Jan 2020 and getting close to ATM. I've been waiting for months to roll them out, after a bounce back, which hasn't happened...

I think I'd avoid XEG. Since the big players are so cheap right now there's a good chance that everything will rise significantly on good Cdn. oil news. But if oil stays flat then XEG might keep trending down while the Suncor and Exxon doesn't move. Then if prices rise XEG will have a long ways to go to catch up with Suncor.


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## kelaa (Apr 5, 2016)

I was reading TD analyst reports the other day and I think some of the Montney shale companies (Bonavista, for instance) may be approaching their debt covenant. Recapitalization is not a word one would want to hear.

I have a feeling that the Canadian energy woes will be longer and more dire than late-2015/ early-2016 scare.


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## doctrine (Sep 30, 2011)

My bottom fishing of energy stocks which was underway for a few weeks before my 18 Aug post has paid off nicely. I think the index as a whole remains quite undervalued. Maybe more undervalued, given that the index hasn't risen as much as the oil price, but maybe that reflects some risk that the price may fall. 

Regardless, many oil stocks are still only at 50% of their 52 week highs, and some are still at 20-25% of their all time highs. And they make money down to $50 WTI. They make money hand over fist at $62, given all of the structural cost reductions that have occurred.


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## Topo (Aug 31, 2019)

Interesting SU and HSE are up about 6.5% for the day, but CNQ is higher 12.9% and VET is up 11.3%.


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## Topo (Aug 31, 2019)

ZEO could be a better ETF for a buy-and-hold investor in this sector, because it is equal weight. XEG has about half its weight in CNQ and SU.


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## AltaRed (Jun 8, 2009)

A lot of the movement depends on how beat up certain stock prices were last week relative to each other, how a company's near term crude is contracted, what is the operating margin between revenue and operating cost, and how much of a company's crude can benefit from the higher prices, e.g. equity owned refining capacity in the USA. There is little, to no, basis for the ranges of today's price action. Some producing companies won't even see revenue increases depending on their contracting arrangements and how long the Saudi debacle lasts. Just as stock prices for many companies got obscenely low (e.g. price to book), so too can be over-reach by movements today.

It would take a wizard analyst, or long time oil sector money manager, to know the impact of the various drivers for a number of companies. Even the likes of Josef Schachter and Eric Nuttall have a hell of a time making good calls. Recent commentary by Eric who I think is a little wild at times https://stockchase.com/expert/view/1291/Eric-Nuttall When you get companies lying flat in the ditch, it doesn't take much in good news to actually make a double in a matter of days.

Today's commentary from Josef https://stockchase.com/expert/view/137/Josef-Schachter Pretty nonchalant about it all.


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## agent99 (Sep 11, 2013)

I hardly own any energy companies (other than pipelines) these days. But do still have some Vermilion (VET). In trying to decide whether or not to keep it, I have been reading reports for a while. Yesterday *added* a little (~$5k) in my TFSA. The reports (and the CEO) said they could maintain their distributions? - they are very high! Almost like in Income Trust days! Stock had a little spike yesterday, but then fell back a bit. Anyway, just a little play money in TFSA.


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## james4beach (Nov 15, 2012)

I hate to say this but I think the technical picture has turned bearish again. There was a hope there in September with some rallying but it fizzled out awfully fast.

I view this as a continuation of the bearish trend in energy stocks
XEG chart, Canadian energy
XLE chart, US and multinationals

Same story. Nothing to do with oil sands or Canada specifically... looks like a continuing bear market in global energy.

Certainly not good for my SU & ENB positions.


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## doctrine (Sep 30, 2011)

After about 6 weeks in my positions, I traded out of my oil positions maybe 10 days ago. I think that had oil and XEG held steady or even inched higher in the week after the Saudi attack, I would have stuck around, but everything was signalling weakness especially the futures. Still have my pipelines though. 

Now it's totally turned bearish. I might consider another trade but not seriously until we're back above the 20 day moving average to start.


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## humble_pie (Jun 7, 2009)

i still have difficulty factoring in the colossal capacity of US fracked energy. The newish kid on the global energy block. Makes interruptions to saudi/OPEC output less disruptive

when they dreamed up alberta tar sands extraction technology half a century ago did the verb Frack even exist. The dinosaurs of that era do not seem to have prepared for contemporary fields.

smart Norway. Built up its sovereign wealth fund while the going was good.


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## james4beach (Nov 15, 2012)

Norway was really smart (just sensible actually). This is obviously a boom & bust industry. When the good times are rolling, you have to save up, because a bust is inevitable.

The story is the same for the Alberta oil sands worker. Salaries and opportunities in Alberta were enormously strong -- there was no excuse to be delinquent in saving. Look at CMF money diaries and you'll see how much rapid wealth was built up during the boom years for oil.

I have an ex girlfriend who worked in O&G right out of university. She made tremendous salaries, probably 2x to 3x what her peers were making elsewhere. She is currently unemployed and has struggled to find a job for years... but this is natural and expected, and she made more than enough money to compensate her for that.


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## james4beach (Nov 15, 2012)

https://www.bloomberg.com/news/arti...canada-equities-to-record?srnd=premium-canada

This article has fund inflow/outflow stats for XEG. October is showing the largest inflows (new money) in many months. Will be interesting to see what happens with this pattern over the next year.


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## AltaRed (Jun 8, 2009)

I think it is premature but I am not in this industry for a reason, i.e. it is mostly a roll of the dice. I suspect differentials will narrow a bit once the Canadian portion of Line 3 replacement goes into service later this year and adds some incremental capacity. That might be driving a bit of the inflow as well as Q3 earnings. To me, the bigger question will be whether WTI can average $60 or so this coming year. I am not certain it can with global growth slowing and new production coming online. 

Setting aside changes in WCSB differentials, there is a lot of volatility in Cdn oil stock prices (and company profitability) if WTI is $55 or $60. Utopia would be $65.


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## cainvest (May 1, 2013)

I keep an eye on XEG every now and then ... If it dips a fair bit lower I might swing trade it again.


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## AltaRed (Jun 8, 2009)

cainvest said:


> I keep an eye on XEG every now and then ... If it dips a fair bit lower I might swing trade it again.


Care to define best guess for "fair bit"? Maybe all time low circa $7.60? $8?


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## cainvest (May 1, 2013)

AltaRed said:


> Care to define best guess for "fair bit"? Maybe all time low circa $7.60? $8?


Definitely in the $7 range and I wouldn't be "betting" any serious money on it anyways.


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## Borat (Apr 28, 2017)

I picked up XEG at 8.50 then more at 7.70. Should have sold after Saudia Arabia was attacked for a very short term and very nice increase, but held on instead.


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## doctrine (Sep 30, 2011)

XEG and energy are extremely positive in terms of technicals. XEG is well above all moving averages including the 200 day, as are the price of the underlying commodity. Not to mention the huge recent spike in oil, which has not proportionately been reflected yet in stocks. Seasonals are also favourable as refining rates ramp up, and China continues to hit record import levels.

But despite the relative runup, energy/oil remains very cheap by both relative and absolute comparisons both internal to the sector and compared to the market. It is more attractive now on a valuation/earnings basis with oil at $64+ (Brent close to $70) than 5-6 months ago with the index 15% lower but oil prices at $50-55. CNQ for example, which is 25% of the index is paying down a lot of debt, growing production by 7%, and buying back 5% of the company this year while paying a 4+% dividend. At a budget of $56 WTI. At $64, free cash flow is much higher.


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## james4beach (Nov 15, 2012)

doctrine said:


> XEG and energy are extremely positive in terms of technicals.


I disagree. I would call the technical picture promising in the short term, but still bearish in the long term and would be more tempted to go short than long.

Here's the 5 year chart I'm looing at

It's only a little bit above its 200 day moving average, and has trouble staying above that. Worse, XEG recently made a lower low (summer low). There are no new highs being made at all.

A strong stock/index will typically make higher lows, higher highs, and stay above its 200 day moving average. XEG isn't doing any of these things yet and to me, this looks like an index which is still winding its way down.

In my Canadian portfolio, I still have the same 20% energy weight, which effectively means I am "buying low". As the sector has declined, I have bought more to maintain that 20% weight, same as I would do with banks.


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## james4beach (Nov 15, 2012)

I'm still sticking with this above ^ technical analysis. And now XEG has fallen again below its 200 day moving average. Very similar action on XLE (global/US) so nothing specific to Canada... this sector still appears to be in a bear market


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## doctrine (Sep 30, 2011)

If XEG can stay well above $8.25, it is very tradeable. Admittedly, it doesn't have far to go and then below $8 is in sight again. I would also watch that very closely and if it doesn't make a new low at $7.7 then it is also very positive. There is still 3-4 months to go in the oil consumption ramp-up period. But Alberta oil is at a huge discount and pipeline relief is still a while away. Currently on the sidelines but if I see a short term bounce using 3-6 month time frame then I might try to trade it, but I will pretty much do nothing if the $8.25/$8/$7.7 levels don't hold.


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## james4beach (Nov 15, 2012)

If tonight's 20% oil crash is any indication, XEG is probably going lower Monday. Is anyone here putting in lowball bids on XEG? And by lowball, I mean maybe 30% or 40% below current. Fire sale kind of prices, not just "mild discount".

Must be very careful when trying to catch a falling knife, though. Personally I am still not feeling the love for buying XEG, though I'm tempted to put in a bid at perhaps 40% below Friday's price like near $4


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## cainvest (May 1, 2013)

I wouldn't react quickly on XEG, just see how the week goes...


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## doctrine (Sep 30, 2011)

XEG at $4 implies Suncor at $20. That is a price Suncor traded at or near from 2011-2013. Suncor has grown a lot since then but it seems reasonable it could get to 10 year lows. If you think this is worse than 2011-2013 then maybe it could go lower.


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## Rusty O'Toole (Feb 1, 2012)

That is called catching a falling knife. Trying to pick a bottom is dangerous, better to wait until you see signs of recovery. Better to catch 75% of the recovery, than half the crash.


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## nobleea (Oct 11, 2013)

james4beach said:


> If tonight's 20% oil crash is any indication, XEG is probably going lower Monday. Is anyone here putting in lowball bids on XEG? And by lowball, I mean maybe 30% or 40% below current. Fire sale kind of prices, not just "mild discount".
> 
> Must be very careful when trying to catch a falling knife, though. Personally I am still not feeling the love for buying XEG, though I'm tempted to put in a bid at perhaps 40% below Friday's price like near $4


Doesn't look like a $4 bid would be low enough. Down 27% today to $4.80. I can see it dropping through $4 and lower if this sentiment continues and it probably will.


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## fstamand (Mar 24, 2015)

Bought some at $4.80. Maybe too quick. -27% in a day is impressive (and a bit scary!)


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## humble_pie (Jun 7, 2009)

the question in my mind now is which small & mid cap canadian energy companies are going to be shut in

whatever sales at current prices will not be able to offset debt

they're saying that senior comanies w deep pockets - the suncors, CNQs, etc - will survive. But new equity will not flow to small & mid caps, leaving them dependent on bank lines of credit, which some reports say are being pulled


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## doctrine (Sep 30, 2011)

Small and mid caps are being priced like their debt holders will be forced to recapitalize the companies. It's hard to see a world where OPEC lets off before December and maybe even a year from now. There is just too much production and hedging only delays the response. This is a once in a generation chance for them to suffer for a year or two and really deal shale a critical blow. 

Holding some shares in the big guys who will survive is a good bet. Suncor and CNQ will be here in 5 years; both will arguably outlive even the big global majors as they require far less capital to sustain production.


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## AltaRed (Jun 8, 2009)

There is now 'save face' at play with both Russia and Saudi having placed shots across the bow. I agree a very low price environment could play out over some lenghty time.


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## james4beach (Nov 15, 2012)

Is this the long-awaited recovery in energy, or another false start?

XEG is up 13% today with Suncor up 21%, CNQ up 18%


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## doctrine (Sep 30, 2011)

Suncor now up 26%. But it is still below $20 and was at $40 just in January. 100% upside still? This is a big gap up and that often signals a technical shift. Also large caps are moving up faster than small caps. That is an incredibly positive sign in my mind as it means bigger institutions are buying back in.

Certainly that 200 day moving average will be a tough one to break. I have it at $5.16. Fundamentally, there is virtually certain to be a massive supply crunch in the next 1-3 years, unless _maybe_ oil consumption stays at current pandemic levels, which seems very unrealistic. Sooner or later, that 200 day will break. Next year there could be a huge demand for oil if vaccines roll out by summer.


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## james4beach (Nov 15, 2012)

doctrine said:


> Suncor now up 26%. But it is still below $20 and was at $40 just in January. 100% upside still? This is a big gap up and that often signals a technical shift. Also large caps are moving up faster than small caps. That is an incredibly positive sign in my mind as it means bigger institutions are buying back in.


I agree that it's very promising that large caps are acting stronger than small caps. That requires institutional money.


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## peterk (May 16, 2010)

james4beach said:


> I agree that it's very promising that large caps are acting stronger than small caps. That requires institutional money.


What is this referring to? Is that a known market behavior or something?

I figure that big oil doing better than small is just an acknowledgement that conditions are "improving" enough that the business models of the large companies with established processes and debt access are recognized as sound, while the economic condition improvement in relation to the small companies is only a "step in the right direction" but their futures are still quite uncertain.

This is what I was thinking last week and was actually considering dumping all my XEG and mid caps for SU, but alas, I was still "thinking about it" by the end-of-day Friday.


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## Rusty O'Toole (Feb 1, 2012)

James may be referring to the fact that when a bear market ends it is the blue chips that investors turn to first, and they are the first to recover. Later when the blue chips are fully valued the cats and dogs have their day.


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## james4beach (Nov 15, 2012)

peterk said:


> What is this referring to? Is that a known market behavior or something?


I mean that when you compare a small cap to a large cap company, it takes a lot more money (buying interest) to move the shares of a large cap.

When you have a penny stock, just one little guy at home can make the shares move 10% with a small amount of money. But that's not the case with large cap stocks.

When you see Suncor rise 30%, it pretty much means there has to be institutional money at work. Some hedge funds, pensions or mutual funds are adding to their positions. That's the only thing that can make large cap stocks move significantly.


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## doctrine (Sep 30, 2011)

james4beach said:


> When you see Suncor rise 30%, it pretty much means there has to be institutional money at work. Some hedge funds, pensions or mutual funds are adding to their positions. That's the only thing that can make large cap stocks move significantly.


33 million shares traded on SU on 9 Nov when it closed at $19.05, up 25% in a single day. It is now above that level at $19.76 currently, which is very positive and close to a 3 month high. Institutions are beginning to position themselves for a recovery in oil. 

I still have more money in CNQ, which is actually closing in on its post-pandemic high from June. Both SU and CNQ are currently at maximum production including refineries, unlike the vast majority of oil companies, both national and private, which are restricting production or declining it because they have no other choice. That shows you what low cost producers can do.


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## james4beach (Nov 15, 2012)

The XEG chart is looking more bullish to me every day. Finally, it's rallying strongly above its 200 day moving average.

In hindsight, maybe I should have bottom-fished XEG. Oh well. Everything is easy in hindsight and I don't like speculating in sectors. I get enough benefit from energy rising as I'm heavily invested in the TSX, and of course, we also get CAD strength (preserving our absolute wealth) with energy and commodity strength.


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## dubmac (Jan 9, 2011)

Today's the first day that my WCP position turned green. Wow. a miracle!


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## doctrine (Sep 30, 2011)

All of my energy positions are doing well although I never fell into the red because of my CNQ @ $11 position, which is now closing in on 200%. I was buying Suncor at $15 just 3 weeks ago - up 40%. But it has a long way to go - still 100% to just last January.

Technicals are great. Stocks are leading the commodity which means more than just fundamentals, investors themselves are becoming more interested. It is easy to see a world with few or no travel restrictions by the summer when oil demand peaks. Stocks always price in events 6-9 months out.

There could be short term pullbacks. But we're in December almost which is also the beginning of oil's technically strong seasonal period. Oil demand between now and next summer is going to soar. By the time vaccinations start rolling out and deaths drop, these stocks will have moved much higher and may even start selling on that news.


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## Eder (Feb 16, 2011)

I agree...as far as the market is concerned Covid is a memory.


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