April 23, 2025 | Next Low Risk BUY Window For Energy Stocks Expected In May As WTI Retreats Below US$60/b.

US stocks are now rebounding from the nasty fall from 45,100 in The Dow Jones Industrials Index (in late January 2025) to 36,600 (in early April 2025) as tariff news is less alarming. As more US companies visit the White House and talk of the damage the announced tariff rates would hurt their businesses and raise prices for customers, the trade policy is getting a reset to deal making and a desire to find a path forward with the US’s largest trading deficit country, that of China. The Dow has recovered to 39,860 today on Trump’s announcement that he would not fire the Federal Reserve Chairman. From a market view this 3,260 point rally after a 8,500 decline is normal in corrective markets. We still believe that the resolution of tariffs will have good and bad days and that the next challenge period (likely in May) could drive stock prices for the general stock market lower.

Our expected downside targets are:

• Dow Jones Industrials Index 35,000 (now 39,860)
• S&P 500  4,800 now (now 5,392)
• NASDAQ 13,000 (now 16,711)
• S&P/TSX Energy Index <225 (now 242)
• WTI  <US$60/b (now US$62.20/b)

As this decline progresses in the coming weeks we should see more capitulation from leveraged investors who get nasty margin calls. Intermarket pressure should take energy stocks down as well as the overvalued tech sector (AI and semiconductor stocks the most overvalued still) and provide energy investors with the next low risk BUY window. This may trigger a Table Pounding BUY signal and we will send out to SER subscribers another Action Alert with new BUY ideas.

The Trump tariffs have still not been seen by customers as inventories of current stock need to be sold and then new imported items will carry the tariffs and become relatively expensive. Stores such as auto dealerships are seeing good traffic as buyers want to complete transactions at current prices.

On the positive side Secretary of the Treasury Scott Bessent has made comments that a trade deal with China is possible and that the US in a sign of progress could lower the tariff rate from 145% to 50-65%. Still a high number but less onerous. This comes after retailers including Walmart made a visit to the White House to plead their case that they could see empty store shelves in the coming months. This appeal comes after Apple got a tariff exemption for iPhones and other imported tech from China. China has a 125% tariff on US imports and has halted imports of US LNG and cancelled purchases of Boeing planes.

On the negative side tariffs on the pharmaceutical industry are coming shortly and these may be onerous for international generic producers. Also, the market has been expecting deals in favour of the US with Japan and Vietnam and so far no details have been forthcoming from the administration. A lot of positive political jargon but not any concrete plans to lower divergent tariffs and non-tariff barriers. We are skeptical of the current positive spin from the White House after the painful earlier high tariff announcements. This is part of Trump’s Art of the Deal – an opening offer that is contentious and not going to move things forward and then some less onerous talk, followed by further deal breakers and then back to a more reasonable posture. Back and forth until something acceptable to both sides comes out but with Trump having the winning  hand.  The next major move will be a bad cop one.

We are watching geopolitical issues more closely as the Iran nuclear talks are  progressing but with Iran adamant that they will keep a nuclear program. The US on the other hand is adamant that they must not get to be a nuclear weapons country. Some intelligence services have reported that Iran could have sufficient nuclear material for more than six nuclear intercontinental ballistic missiles in the coming weeks. These weapons can easily hit Israel, Middle East oil fields of competitors, European targets and even the continental USA. If diplomacy fails in the coming weeks then the US has moved sufficient military resources to the area (carrier fleets) to knock out all of Iran’s nuclear, military and energy infrastructure and cripple the despotic Ayatollah’s regime. The clock is ticking here and it is a ‘black swan’ that would drag stock markets down. Aggressive US sanctions to end Iran’s sale of crude to international buyers could be in place by Q3/25 and this would lift crude prices materially during Q4/25

One more area facing military escalation is around Taiwan. China has increased flights over the area at a greater pace and closer to Taiwan military bases. In addition, they are practicing with new landing craft and portable ports to unload soldiers and weapons for the capture of Taiwan and its smaller islands. The US has assets in the area (Guam) but not sufficient to stop China if they decide to invade. One new possibility is that China with the world’s largest navy could do a naval blockade of the country and severely impact Taiwan imports and exports.

The war drums are beating and any miscalculation could set off some more regional wars. The US military is overstretched and its munition stocks are low from supporting Ukraine.  Europe, Japan, the UK and Australia all have the same empty munition stocks. China knows this and could take advantage of the trade war and turn it into a real war. There can be no real winners if a conflagration commences.

We have not yet seen in the current market decline a lot of disgorgement of assets. Investors, especially retail investors have been buying the dips. Historically at market bottoms they are in fear mode and selling. Panic climactic action is always seen at market bottoms and we expect this to occur in the coming weeks. Use this market mayhem to add to your favourite energy positions. If we are right that by year end Iran will lose production of >1.5 Mb/d and Venezuela > 500 Kb/d then there will be a significant shortage of crude production and prices will lift over US$80/b. Remember global inventories are low historically so even a 1 Mb/d shortfall can drive prices up materially.

For the energy sector we have bargain levels right now. We have already gotten all three of our BUY indicators saying BUY. The third one and the most reliable historically is the S&P Energy Bullish Percent Index. When this reaches over 90% it is a time to take profits and when under 10% a BUY signal. In March 2020 it fell to a Table pounding BUY level of 3.7%. Three Mondays ago it plunged to 0% and stayed at that level for three days. The only other reading this low was in 2008 at the worst levels for the market averages and stocks during the financial crisis. Use upcoming weakness to BUY your favourite energy investments and consider moving to a full weighting; whatever that is for your personal portfolio needs. Check with your investment manager/advisor to make appropriate individual company decisions.

Josef Schachter April 23rd, 2025

Posted In: Schachter's Eye On Energy

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