OIL - /CL - USO - Futures & Oil ETFs

S&P 500 and Energy Correlation Reverses
Tue, Sep 6, 2022

Early in 2022, extremely high oil and gas prices provided a headwind to the broader economy and significantly contributed to inflation, forcing the Fed to embark on its current aggressive policy of rate hikes. Rising energy prices and higher interest rates led to a divergence in the performance of the Energy sector, which rallied on higher energy prices, and the S&P 500, which came under pressure due to higher rates. As a result, on both a 100 and 200-trading day basis, the correlation coefficients between each index's closing prices hit the second most negative levels since 1990.

Since 7/15, though, the extreme negative correlation between the Energy sector and the S&P 500 has started to reverse, In fact, the 100-day correlation has even just recently moved back to positive levels, meaning that the S&P 500 and the Energy sector have begun moving more in the same than opposite directions. Although the 200-day correlation coefficient is still near extremely inverse levels, it too has stopped going down and is starting to move towards a more positive relationship.



As mentioned above, on 7/15, the 100-Day correlation turned positive while the 200-day remained negative, which has only occurred seven other times since 1990 (with no other occurrences in the prior three months). The table below summarizes the performance of both the S&P 500 and the Energy sector following these occurrences. As you can see, with regard to the S&P 500, there is no clear trend in performance going forward as returns have generally been in line with the historical average for all other periods. As for the Energy sector, performance six months out was quite weak, as the sector was positive less than half of the time with a median decline of 0.4%. The last 25 years have been especially weak as the sector was lower six months later four times in a row.



The chart below provides a visualization of the collective returns following each of the occurrences in the table above. When it comes to the S&P 500, its median return was better than 'normal'; over the following week and month but weaker over the following three and six months. Similarly, the Energy sector also posited weaker than normal returns over the following three and six months.

 

Energy Surges Without the S&P
Mon, Oct 10, 2022

Taking a glance across sector ETFs in our Trend Analyzer tool, performance last week through Friday's close wasn't fully lost as many sectors managed to hold onto their gains from earlier in the week while others like Real Estate (XLRE), Utilities (XLU), and Consumer Discretionary (XLY) finished more firmly in the red. As was the case earlier this year, the most standout sector has continued to be Energy (XLE). Although the sector has been pretty much trending sideways since the late spring and remains down double digit percentage points from its 52-week high, short term performance has been impressive. Last week the sector ETF rose 13.6% to move from one standard deviation below its 50-day to one standard deviation above. Meanwhile, every other sector remains oversold.



Compared to the S&P 500's modest gains on the week, Energy's outperformance has little precedence prior to the pandemic. Below we show the spread of the five day performance of the S&P 500 Energy sector and the S&P 500. Rounding out last week with a high of 12.4 percentage points, the spread hit the highest level since the first week of January. Prior to that, March, June, and November 2020 were the only other recent occurrences with as large of a spread. In our data going back to 1990, the only other time that Energy has outperformed the broader market by as much in a one week span was October 2000 and April 1999.

 

Carson House View Spotlight: Bullish on Oil
Posted on February 21, 2023

Carson’s House Views are the foundation of our asset allocation recommendations. Our partners and clients can utilize these directly through our proprietary House Views models or expressed independently using various ETFs available on our platform. We’re overweight commodities strategically and tactically due to improving demand as global economies recover from a difficult 2022 and China re-opens its economy. Arguably the most important commodity is oil, which has dramatically recovered from its pandemic lows. While energy prices have since come off the boil due to global growth concerns, we believe both the macro and micro views are favorable from a demand and supply standpoint. In short, we’re bullish on oil.



The Oil Market Remains Tight
The global oil market is walking a tightrope between supply and demand. Several factors could cause the market to wobble, leading to higher prices. At the end of 2022, drillers produced about 1 M barrels more than the world consumed. That’s only about 1% of the excess supply! This balance is expected to tighten in 2023, potentially leading to a slight shortage by 2024. Of course, that forecast assumes everything goes as planned, which rarely happens in the oil patch.

Where’s the Supply?
Supply isn’t easy to come by. The conflict between Russia and Ukraine puts about 10 M barrels of global oil supply in a precarious position. Russian oil continues flowing for now, but any interruption could knock oil markets off the tightrope and lead to significant shortfalls. The Saudi-led OPEC cartel claims it can increase oil production by 3 M barrels daily, but there is scant evidence to back that. The US is the swing producer or the country with excess economic supply. US producers are reluctant to increase production because they’ve been whipsawed by prices over the past decade, often losing money and being ousted from investors’ portfolios. To increase production, drillers and investors need confidence that oil prices will remain resilient.

Can future demand remain supportive?
We think the world will keep chugging and guzzling black gold in 2023. Oil prices have fallen over the last six months as the Fed hiked rates and fears of a global recession weighed on expectations for future demand. With China re-opening and the global economy averting recession, demand could likely exceed expectations. While softer-than-expected demand could cause oil prices to dip, underinvestment in new supply over the past decade will lead to supportive prices for several years.



Bottom Line
The oil market is already tight, and disruptions to supply could lead to a shortfall. However, even without a supply shock, modest growth in demand could tip the balance and push prices higher. We think this will disproportionately benefit US producers. Partners in our House Views models have exposure to oil via Invesco’s Diversified Commodity ETF (PDBC). For those curious about direct exposure to US oil-producing companies, check out the Energy Select SPDR® (XLE) now available on our platform.

 

If At First You Don't Succeed...
Thu, Apr 13, 2023

After rallying more than 25% from its intraday low on March 20th, WTI crude oil surged above its 50-day moving average (DMA) last week after the surprise production cut announcement from OPEC+, the commodity traded sideways for a few days and then started to rally again Wednesday. That jump put the 200-DMA into play, but on its first attempt crude came up just short.



With WTI still below its 200-DMA, its current streak of closes below that level remains intact. That extends what has been the longest streak of closes below that level since the record of more than 400 trading days back in April 2016. While this streak is nowhere near as long as that streak, it ranks as one of just eight streaks that have lasted as long or longer. Not only that but if the current streak lasts another three weeks it will move up to number five in terms of the longest streaks below the 200-DMA.

 

Energy Energizes M&A Activity
Mon, Oct 23, 2023

The past few weeks have seen a boom in merger and acquisition news. For starters, what was approaching a two-year-long process of Microsoft (MSFT) buying Activision-Blizzard finally went through in what would be one of the largest M&A deals of the past five years and the largest in Microsoft's history. On top of that, there have been a number of new announcements this month, primarily in the energy space. Earlier this month Exxon Mobil (XOM) proposed a $60 billion bid for Pioneer Natural Resources (PXD), and Chevron (CVX) followed suit today with a $53 billion bid for Hess (HES). Additionally, while nothing is official yet, last week there were reports that Marathon Oil (MRO) and Devon Energy (DVN) have been in talks.

In the charts below, we show the pending counts and nominal dollar values of M&A deals by month over the past decade. As shown, the past few months have seen the number of deals ramping up with a record amount of activity based on dollar values. Perhaps more impressive has been the dominance of the Energy sector in these M&A announcements. As shown in the second chart below, they have accounted for over 80% of the value of these deals, the highest amount of the past decade.