Additional Factors to Watch When Trading Oil and Gas Stocks

When trading stocks or stock options intraday or short term, you need to make entry and exit decision based on various criteria, which will be different depending on your personal style of trading and preferences. These criteria could include stock or sector related fundamentals or headlines, price action, volume, technical patterns and indicators and the overall market action.

When trading oil and gas related equities, there’s an addition factor that you need to take into consideration:

1. the oil and gas futures markets.
2. macro and geopolitical events

These two factors are directly related, since the futures will reflect and be effected by macro and geopolitical events.

Oil and Gas stocks are therefore effected both by general market conditions and movements, since they are part of the major indexes such as DOW, S&P or Russell 2000, as well as by oil and gas futures and the macro events that move them.

Analyzing price action or technical setups is not enough to get into an energy stock trade. You must take into account futures and events factors to properly manage your risk. This becomes even more vital during times of energy related volatile, which we are experiencing right now as a result of the Russia-Ukraine conflict, China lockdowns and general supply shortages stemming from reduced production during the Covid period and political opposition to fossil fuel exploration.

In this type of volatile energy environment, a trader swinging a position overnight must accept and prepare for the possibility that an unexpected geopolitical event can occur that can drastically impact your position.

For example, let’s say you sell short shares, or buy puts, of Chevron (CVX) for a short term swing trade based on technical factors in the chart that you think look favorable for a move lower. You place a stop order at what you feel is an appropriate level for your risk management. You wake up the next morning to find out that the Russians have decided to cut all gas supplies to Western Europe because a British made missile, fired by the Ukrainian army, hit and destroyed a Russian munitions depot.

The S&P futures are flat on the news, but crude oil futures are ripping higher. CVX has gapped several points above your stop in the pre-market. There’s nothing you can do with your options premarket, which are probably close to worthless anyway, especially if they are weeklies. You decide to wait and see what happens to the stock when the market opens. In any case, your risk management is useless at this point and you are left with the choice of covering your position at a significant loss or turning your short term swing into a longer term hold, if you are still confident in your trade thesis and believe that the price spike will just be temporary.

If you were long the stock then I guess you’d be jumping for joy. But that would just be dumb luck, and basing your trading career on dumb luck is not a recipe for continued success.

If you do want to swing energy names in this volatile market, one way to mitigate your headline risk is to size down your position size so if there is a surprise, you won’t get hurt in a significant way. You can also hedge your stock position with options or futures, and your options positions with spreads.

The same risks also apply to intraday trading, when a story about a new OPEC plan to increase supply can send a stock plunging in seconds, or a pipeline breakdown can send that same stock soaring.

There’s really no way to defend against unexpected market moving events, other than the usual risk management techniques. But if you decide to trade oil and gas names, be aware that your breakouts and patterns and other technical theories will be rendered void and useless in the face of a macro or geopolitical news event.

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