Are Energy Stocks Close to a Bottom?

Last week I talked about the changing oil supply dynamics. This week, I decided to follow up with a look at stocks in the Energy space.

Simply put, Energy stocks have not been a good place to invest over the past 10 years. Below is a ratio chart of the sector to the S&P 500. After a stellar run of outperformance from 2000 through early 2008, Energy has been in a clear downtrend relative to the overall equity market. The collapse in oil prices that began in 2014 only exacerbated the underperformance. (Click chart to enlarge)Energy vs SPX

Has Energy really been that bad, or is the above chart merely the product of a more than 300% rally by the S&P 500 since its 2009 lows? It’s more of the latter. The sector climbed off its 2009 lows, too, but failed to hold a break to new highs in 2014. Now it sits near the midpoint of a range it set up more than 10 years ago. Though prone to rapid rallies and steep declines, Energy stocks have gone nowhere for a decade.Energy.PNG

Crude oil, though, has begun to show signs of progress. While still well below 2008 highs (and far from being in a convincing uptrend), oil prices have set a series of higher lows and have spent much of the last 18 months above their 200-week moving average. Is it time for Energy to make another run at its highs? It’s possible.

Two sub-industries – Integrated Oil & Gas and Exploration & Production – make up nearly 75% of the overall sector. Both groups set new highs and subsequently failed to hold them in 2014, and both lack much of a trend.Integrateds.PNGExploration and Production.PNG

While these two don’t offer much in terms of nearby levels to watch, the other 4 sub-industries are near important areas. Their action could be a clue as to how the larger, more important industries resolve their years-long consolidations.

The Oil & Gas Storage & Transportation Sub Industry is currently testing the $200 level for the 7th time in the past 3 years. Some technicians argue that the more times a level is tested, the more likely it is to break. Others say it only reinforces it. Either way, the area clearly has importance and a break above it would be a positive for Energy stocks.Storage and Transportation.PNG

The Drillers have underperformed the rest of the sector and are currently below even their 2009 lows. The trend is still down – the price is below a downward-sloping 200-week moving average – but the industry has managed to hold above $120 for 3 years now. Consolidation patterns like this wedge (marked by the red trendlines) should be expected to resolve in the direction of the existing trend, so a break higher would be a notable win for Energy bulls.Drillers.PNG

The Q4 2018 decline in the Equipment & Services group broke what had been an important support level at $400. That level will be tough resistance going forward. Even a 50% rally from current levels would leave prices below their currently downward-sloping moving average, but a recent failed breakdown below the December lows and a bullish momentum divergence suggest that a meaningful bounce could be coming.

Equipment and Services.PNG

Refiners were setting new all-time highs as recently as last year. A decline over the last 8 months has them back-testing the 2007 highs near $700. A weekly close below support on May 31 was worrisome, but prices have since rallied 15%. As long as they’re above $700, the Refiners are structurally healthy.Refiners.PNG

Energy hasn’t been a fun place to be for a long time. Relative to the rest of U.S. equities, they’re still in a downtrend, and the biggest industries in the sector are stuck in massive consolidations. But the smaller groups are testing key levels that could give us clues as to how those massive consolidations will resolve. Maybe upside resolutions across the board will be enough for this sector to start outperforming again. Stay tuned.

Questions or comments about this post? Contact Austin

Nothing in this post or on this site is intended as a recommendation or an offer to buy or sell securities. Posts are meant for informational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in posts. Please see my Disclosure page for more information.

Oil Supply: Who’s in Charge?

“The study of how people allocate a limited number of resources to satisfy an unlimited number of wants.” That’s the definition Dr. Coronado taught me back on the first day of Econ 209, Macroeconomics, and I’ve done my best not to forget it. Resources and Wants, Supply and Demand – it’s the most basic and important concept in all of economic study. The price of crude oil is volatile and subject to everything from political turmoil to holiday travel plans, but today, I want to step back from the news cycle and focus on one of those basics – supply.

The Middle East has long been in the proverbial driver’s seat when it comes to global oil production. An abundance of reserves, superior cost per barrel, and the power of OPEC have made it difficult for North American drillers to compete. But sustained higher oil prices and technology improvements throughout the 2000s and early 2010s allowed North American producers to get a foot in the door. While oil production growth in the region was flat for the 15 years from 1995 to 2009, growth since then has convincingly outpaced the global average.Production Growth Percentage

It’s certainly harder for the rest of the world to grow a much larger production number on a percentage basis, but this phenomenon goes beyond percentages. Compare the cumulative growth in barrels per day. North America represents only a quarter of global supply, yet over the last 10 years has added more production capacity than the other 75% combined.Cumulative Production Growth

When oil prices collapsed in 2014, many high cost drillers were forced to close up shop, but the North American shale revolution proved more resilient than almost everyone expected. The most efficient rigs remained in operation, and their efficiency has more than offset the decline in active rigs. U.S. oil production is at all-time highs.Rig Count vs Production

OPEC now finds itself in a precarious situation. Oil prices are well off their 2016 lows, due in part to a coordinated supply reduction by member states, but the costs of producing below capacity has many governments in tight financial positions. They’ll decide more about their production plans at a meeting later this month. Meanwhile, recent oil tanker attacks near the Strait of Hormuz had a surprisingly marginal impact on prices. That came only weeks after Iran threatened to close the Strait entirely. It’s hard to believe that tensions in a region that produces 30% of the world’s oil (and controls a highway that transports 40% of all seaborne crude) wouldn’t dramatically affect oil prices, but the dynamics of global supply have changed quite a bit in the last 10 years. A powerful new player has emerged. To be sure, the Middle East is still in the driver’s seat, but North American producers are on the passenger side and reaching for the steering wheel.

Questions, comments, or criticisms? Let me know.

Nothing in this post or on this site is intended as a recommendation or an offer to buy or sell securities. Posts are meant for informational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in posts. Please see my Disclosure page for more information.

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