I recently woke up to a sobering and chilling sight as I noted a temperature of 38 degrees Fahrenheit on my backyard thermometer, well below the official temperature registering in the area.

According to the weather forecasters (for whatever that’s worth,) it wasn’t supposed to get that cold, at least not yet. Moreover, since I live in North Texas where we had a scorching summer, 38 degrees felt even chillier.

As I scrambled for a warm hoodie and started my morning routine (warm liquids at the top of the list), I couldn’t shake the thought that the energy sector could be an interesting place over the next few months.

That’s because an already unpredictable winter and what could be a protracted situation in the Middle East may combine to increase energy prices during a period where crude oil supplies are already tight.

I’m not alone. Wall Street is betting on it.

A Bit of a Recap

I’ve been bullish on energy for some time. In fact, I was one of the few analysts who correctly predicted the bottom in oil prices before it became fashionable to be bullish on the sector; way back in May 2023. My portfolio recommendations in my premium service’s portfolio Profit Catalyst Alert certainly bear witness to my current positive stance on the sector.

In May, I based my analysis on what was at the time a supply/demand scenario which favored the oil sector.

At the time, political pressures resulting from the push toward renewables and the on the ground realities of high labor costs and material prices pushed companies to cut production in the U.S. The result was a supply squeeze, worsened by rising summer seasonal demand, the simultaneous draining of the Strategic Petroleum Reserve (SPR) by the White House, and production cuts from Saudi Arabia, Russia, and other members of the OPEC + cartel.

On the other hand, oil companies focused on exploration projects in South America and Africa where political hurdles and costs were more manageable. The result was a rise in crude oil prices rise from the mid $60s to the $90 area before the recent pullback, which was blamed on demand erosion as the global economy showed signs of slowing.

Then the Middle East heated up.

The Pre-Winter Status of Supply

Ahead of winter, the U.S. crude oil supply has been volatile, with some weeks showing supply builds while the following week shows another decline. Still, supplies remain below historical averages according to the most recent data from the U.S. Energy Information Agency (EIA). Furthermore, inventories (primarily diesel and heating oil) are well below their five year averages, although natural gas supplies are rising.

In this article, with the caveat that forecasting is a fool’s errand, I will explore the current money flows in the energy sector and attempt to see what may be next; focusing on crude oil, natural gas, and nuclear power

Crude is Vulnerable to Circumstances Yet Retains an Upward Bias

U.S. crude oil and product supplies remain tight, especially in the context of the ongoing Middle East’s conflict and its potential effects on supplies. That means that costs for heating oil are likely rise with nearly five million homes (80% of the total) in the Northeast U.S. still depending on this fuel as the primary winter heating source.

The U.S. Oil Fund ETF (USO) whose current price is roughly equivalent to the $88 level in crude oil will likely move higher if it can climb above the $83 area, which is akin to the $90 area for West Texas Intermediate Crude (WTIC). Crude currently has good price support at the $80 area. Most oil producers, including OPEC + and U.S. shale, can remain profitable with prices above $80 if they are able to manage costs.

Expect prices to rise further if there is an expansion of hostilities in the Middle East that affects the Strait of Hormuz. In addition, the ongoing drought in the Panama Canal, will also add to transportation costs. Adding to the mix, Egypt recently announced it is raising passage fees by 15% for the Suez Canal effective in January 2024, which of course is traditionally when winter tends to intensify.

Money flows are bullish for the oil related stocks than for crude itself. You can see this in the price charts for the Energy Select Sector SPDR ETF (XLE), which invests in the major global oil companies such as Chevron Corp. (NYSE: CVX) and Exxon Mobil (NYSE: XOM). XLE is within reach of a major price chart breakout with money steadily flowing into the shares; rising Accumulation/Distribution (ADI) and On Balance Volume (OBV) lines.

You can see a similar picture in the VanEck Vectors Oil Services ETF (OIH), which houses the likes of companies such as Tidewater Inc. (NYSE: TDW). Even more impressive is the price chart for the iShares Oil & Gas Exploration & Production ETF (IEO) which is also closing in on a potential price chart breakout.

Natural Gas Stocks Rumble as Nat Gas Sleeps

If you’re looking for a disconnect between a commodity and its underlying stocks, look no further than natural gas. The price of natural gas, as illustrated by the action of the U.S. Natural Gas Fund ETF (UNG) remains subdued, while the action in the stocks of companies involved in the sector is much more encouraging.

Compare the bullish action in the First Trust Natural Gas ETF (FCG) to that of UNG. Whereas FCG is under aggressive accumulation (rising ADI and OBV) UNG is still forming a long base.

The Nuclear Option

Crude and natural gas stocks are in bullish mode. Meanwhile, the uranium sector is consolidating after its recent gains. Yet, over the longer term, this pullback in the nuclear stocks may be an excellent entry point for investors who missed the recent rally.

Shares of the Global X Uranium ETF (URA) have just retreated to their 50-day moving average and could well move lower in the short term. The ADI and OBV indicators are still registering some weakness. On the other hand, a colder than expected winter, especially if oil supplies tighten further could well open the door for increased power demand from nuclear utilities.

Wall Street Bets on Cold Winter

The bottom line is that money is moving into crude oil and natural gas stocks in expectations of a cold winter and the uncertainty in the Middle East. The rally in the energy stocks has not fully extended into the corresponding commodities. This is most evident in the divergence between natural gas stocks and the price of the natural gas commodity. But a lot can happen over the next few months.

U.S. oil supplies are tight by historical standards and transportation issues may arise due to higher prices in the Suez Canal, the drought in Panama, or an Iranian intervention in the Straits of Hormuz. Meanwhile, demand is not likely to decrease.

The U.S. shale belt is not likely inclined to increase oil production given the current political climate and the focus on renewables. OPEC + isn’t likely to be helpful either. Nuclear power is efficient but is only able to cover 10-15% of current electricity demand. That’s without factoring in the potential increased demand from rising EV sales. Natural gas is plentiful, yet pipeline capacity has been restricted by environmental concerns.

Will this be a tough winter? Wall Street is betting on it. I own shares in URA in my personal account.