Holding will be worth the wait
Integrated energy and chemicals giant Sasol has had to endure major drops in its share price over the past few years, but looking at the charts, a recovery is pending.
long-term shareholders in Sasol have been in for a rough ride, with the stock still trading about 40% below its 2014 highs, mainly because of the drop in Brent crude prices. Sasol is very sensitive to Brent crude movement, including the rand/ dollar exchange rate and ultimately the rand price of the commodity.
According to Reuters, hedge fund managers have become very bearish about the outlook for oil prices as production from countries outside the Organization of Petroleum Exporting Countries (Opec) grows and threatens to undermine the effectiveness of Opec’s output controls. With concerns mounting that Opec’s agreed production cuts will fail to support prices, Brent crude declined to sevenmonth lows in June, while US crude dropped to its lowest levels since September 2016.
Sasol, an international integrated chemicals and energy company, has been range-bound between 50 000c/share and 35 400c/share for the past two years, and is currently teetering on the 35 400c/share key support level – maintained since January 2015. Sasol reached its best at 65 300c/share in 2013, which was shortly followed by a huge sell-off when oil prices fell, the rand recovered and the costs at its Lake Charles project in the US increased rapidly to $11bn from an initial estimate of $8.9bn. Sasol has breached the support trendline of its long-term bull trend and is currently teetering on key support at 35 400c/share. Some traders could find these levels as a good buying opportunity, if Sasol bounces on that key support level and extends its sideways pattern.
Its Lake Charles chemicals project, currently under construction in the US, is expected to be fully operational in the 2019 financial year. Cash flows generated outside SA will then begin to equal that generated within South Africa, Moody’s said in a recent credit report. Currently, around 60% of Sasol’s total operating cash flow is generated in SA, meaning the company is to a large extent exposed to the South African operating environment, it said. Sasol believes Lake Charles, which will produce value-added chemicals, will be more competitive than a number of other plants that are currently operational or under construction.
For most long-term investors, holding onto Sasol shares is worth the wait and will pay off when Sasol eventually rebounds and retests prior highs.
How to trade it:
Go long: If Sasol retains firm support at 35 400c/share, then upside to either 41 150c/ share or 43 620c/share would be possible. With the three-week relative strength index (RSI) in mega-oversold territory, a recovery is pending soon. Increase long positions above 43 620c/share as gains towards 50 000c/share could follow. A positive end to the long-term sideways pattern would be confirmed above that level. Go short: Downside through 35 400c/share would be a very bearish move. A negative breakout out of both the primary bull trend and the sideways pattern would be confirmed. If Sasol recovers in the near term from its oversold position on the weekly chart but fails to push through the 43 620c/ share level, prepare to go short below 35 400c/share. The first downside target would be at 30 050c/share, with the next being at 21 655c/share.