RSPG no longer offers an attractive entry point (ratings downgrade) | Private Equity Weekly

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We wrote about the exchange-traded Invesco S&P 500® Equal Weight Energy ETF last August (NYSE:RSPG), touting it as an excellent choice for gaining cross-sectional exposure to U.S. oil and gas in a technologically advanced environment favorite trade. Our original article highlighted RSPG’s unique position in providing equally weighted exposure to large- and mid-cap energy stocks. Since our Buy rating, the fund has risen significantly:

Oil and petroleum stocks have surged this year as markets focus on geopolitics riskwe believe RSPG no longer provides an attractive entry point and will present our views on the fund at this stage of the macro cycle in this article.

Oil surges in 2024

after being abandoned till late Last year, oil prices surged through 2024:

Using the United States Oil ETF (USO) as a proxy for WTI, we can see from the chart above how the commodity could gain more than 22% in price in 2024. ) rose 16%, while RSPG rose 15.8%.

There are many factors contributing to oil’s outperformance this year, starting with OPEC’s actions, stronger U.S. yields, a technical rebound from the lower end of its historical range and now geopolitical tensions.

Oil is a cyclical commodity, and the OPEC cartel has kept it in a tight range for the past two years:

Without a breakout in 2022, WTI oil has been trading in a range from the mid-$60s to the mid-$80s over the past two years, closely managed by OPEC and Saudi Arabia.

Russia and Saudi Arabia engage in political battle after losses during coronavirus pandemic spit This has led to a gap in commodities and the two countries have become more coordinated in recent times.While both countries hope for higher prices, Saudi Arabia been OPEC, the most proactive member, took the lead in cutting production and became the de facto leader of the organization.

While they defended the bottom of the range, we believe now that the top of the range has been reached they will also ease production cuts. Saudi Arabia is a very cunning and nimble producer, understanding that excessive focus on high oil prices is not advisable, and having a well-developed range is effective for operating margins and expectations management. In effect, Saudi Arabia is trying to make oil production less cyclical by reducing oil price volatility, thereby creating a more transparent estimate of Saudi Arabia’s oil revenue.

Geopolitical Tensions—Selling Panic

Geopolitical tensions are synonymous with the Middle East, and we have lost count of how many times they have erupted in the region.Latest development is looming potential Iran attack revenge on israel kill A senior Iranian military figure in Syria. We believe that focusing on such attacks and going long oil based on them is not an ideal solution.

These historic conflict issues have been internalized because Iran/Israel tensions are nothing new. If the attack is milder than expected or does not occur at all, expect the market reaction to be very bearish for oil in the short term. In time we learned that the ideal trade was to sell such “panic” events rather than buy them.

U.S. Treasury yields soar on rising commodity prices

U.S. yields have soared this year on stronger-than-expected inflation, driven by housing and commodity prices:

Note how well the 10-year Treasury yield has correlated with oil prices this year. The chart above shows USO price movements compared to the 10-year U.S. Treasury yield. We believe that much of the growth in yields is now a thing of the past, with the market now pricing in 1 or 2 rate cuts in 2024, and the same for oil prices currently.

2024 is a presidential election year, and further rise in oil prices may trigger surface plasmon resonance release and U.S. political pressure on Saudi Arabia to increase production. All parties involved in international oil trade understand that there is an acceptable range that suits all parties, while extreme situations should be avoided. We believe WTI crude oil prices above $90 will be extremely overpriced and trigger a political backlash. Inflation in the United States needs to fall for political and fiscal reasons.

The underlying stock is now overbought

Investors can learn more about an ETF’s components through the “Holds” tab on the ETF’s landing page in Seeking Alpha. This fund is an equal-weighted fund, and each fund has an equal weight in the ETF.

Similar to oil, the underlying asset is now overbought, sending a red signal:

Above is one of the fund’s holdings, Marathon Oil Corp. (MRO). The lower half of the chart shows RSI data for the name, with the stock in overbought territory. Reminder to retail investors:

The Relative Strength Index (RSI) is Momentum indicator Used for technical analysis. RSI measures the speed and magnitude of a security’s recent price changes to assess whether a security is overvalued or undervalued. Traditionally, an RSI reading of 70 or above indicates overbought conditions. A reading of 30 or below indicates an oversold condition.

The MRO shows an RSI of 76, which is in overbought territory. As an investor, you want to buy when an asset is “cheap” or oversold. Instead, people let down their guard when exposed, or don’t enter a name when overbought. The same technical set-up can be observed for most of the names that make up the RSPG.

Upside risks

The upside risk scenario is represented by conflict in the Middle East, which would cause oil prices to rise significantly from current levels and could lead to extremely high oil prices for an extended period. Higher oil prices will ultimately lead to higher profits for the oil and gas majors, which will ultimately benefit RSPG Holdings. Note, however, that oil and gas stocks lag significantly with spot oil prices because the forward curve does not equal current spot levels and it takes time for companies to convert rising prices into profits.

However, we believe the OPEC cartel has the ability and willingness to respond to such events by reversing production reducewhich just happened in March 2024:

NEW YORK — Some members of the oil cartel OPEC, led by Saudi Arabia, and allied producers such as Russia deepen again They voluntarily cut crude oil supplies. The OPEC+ Secretariat pointed out on Sunday that several OPEC+ countries announced the extension of production cuts of about 2.2 million barrels per day. Saudi Arabia led the way, extending its previously implemented production cuts of 1 million barrels per day until the end of the second quarter of 2024.

in conclusion

RSPG is an energy exchange-traded fund. This tool represents an equal-weighted approach to U.S. large- and mid-cap energy stocks. Since we gave the fund a Buy rating, it has gained more than 15%, benefiting from this year’s sharp rise in oil prices. With WTI oil prices at the top of their historical range and oil stocks in deeply overbought territory, RSPG is no longer an attractive entry point. New money would be better off waiting to come into the fund, and holders would be well served by selling some covered calls at today’s levels.