Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of Energy XXI Ltd. (NASDAQOTH:EXXIQ), Breitburn Energy Partners L.P. (NASDAQOTH:BBEPQ), and SM Energy (NYSE:SM) rallied at least 10% late in trading today as the price of oil shot higher.
So what: The price of crude oil for delivery in April surged over $3, from a low of nearly $42 per barrel today to over $45, after the Federal Reserve concluded its two-day meeting and Chairwoman Janet Yellen completed a press conference. The Fed said it was worried about economic growth and employment but removed the word "patience" from its release, indicating that it's beginning to move closer to raising rates. But that's no surprise to the market, and investors seem to think the Fed will keep rates low longer than was expected, which sent stocks higher and the dollar lower.
The real reason oil was up so much was a plunging U.S. dollar, which is the currency with which most oil trading is priced. If the dollar is worth less, it will take more dollars to buy a barrel of oil, which means oil prices rise. Today's move was evident in two ETFs: the United States Oil ETF (NYSEMKT:USO) and PowerShares U.S. Dollar Index Bull ETF (NYSEMKT:UUP).
Now what: The reason Energy XXI, Breitburn, and SM Energy climbed today is that they're highly leveraged to the price of oil. As oil has fallen in recent months, their stocks have plunged, and this is a reversal of those fortunes.
While this reprieve is good for energy stocks, it doesn't change the fundamental challenges facing the industry. Inventories in the U.S. are at record highs, supply from shale plays continues to grow, and there are questions as to how much demand will grow, particularly in China. For those reasons, I don't think the pop in these stocks is worth buying today, and I'd wait for a more fundamental improvement in the market before getting bullish on energy.