7 reasons to keep an eye on oil

Certain sectors have been ignored as the tech-boom dominated the market in the first half of this year. There is a good potential for financials, industrials, materials, energy, and small-cap value to outperform the Big Tech names for the balance of the year. The higher cost of capital (aka interest rates) will pressure the stocks with the highest PE ratios, in turn curtailing  stock prices.  Investors, IMO, may seek safety in value and may drive portfolio allocation into the above areas as we move into slowing or recession mode. Core PCE Services inflation (ex-housing) while slowing, is still  likely to remain above the Fed’s fantasy 2% goal (long termed CPI avg. is 3.75% since WWII).  This will keep CPI above the Fed’s fantasy 2% goal. This should, in turn, continue to cause the Fed to sound somewhat hawkish even if they discontinue tightening. While all of these sectors should be on our radar for possible if not probable rotation, I am particularly intrigued by the energy sector – specifically oil.  Below are seven reasons to keep oil in your sights for investment potential.

1) Production cuts. OPEC has cut production by more than 1.5ml bpd since Nov 2022. This was partially offset by non-OPEC increases but net still a loss of 800K bpd. Saudis now will remove another 1ml bpd from the market for the next 2 months. One reason for the Saudis to prop up oil prices is to get higher prices for their Aramco secondary offering later this year.

2) Strategic Petroleum Reserves, which I have addressed in the past (SPR) has stopped releasing emergency barrels and has turned into a slow buyer of oil. Note the dramatic decline in SPR after the US mid-terms as Democrats chose to draw on reserves in order to ensure low prices coming into last years mid-terms. Now, they are restocking.

3) Speculators are still extremely short WTI, with positioning the lowest since early 2016. Source: BearTraps.

4) US is now in a seasonal peak oil demand period, as demand for gasoline and jet fuel peaks during the summer. Demand around the 4th of July was the highest since 2019. Meanwhile, oil futures pricing can rise from now into the fall, according to seasonal studies.

5) China stimulus:  China may continue to stimulate its economy, with more measures to be announced around the politburo meeting at the end of July. These won’t be focused on industrial demand (like in 2009) but more on stimulating consumer spending, which is more bullish for oil than for industrial commodities.

6) Technical signs are showing some signs of positive momentum divergence. See chart below. Top pane is MoneyFlow Momentum, which is diverging positively. Stochastics is a neartermed indicator, while the bottom pane (MACD) is a longer termed price momentum indicator. Their bullish divergence patterns are pointing to possible near and longer termed upside.

 

7) The world needs oil, now and in the future! Beyond the data I have offered recently in my blogs and videos regarding the need for fossil fuels going forward in the coming 15-20 years, I thought I would pass on a brilliant commentary by George Carlin. The classic comedian was an insightful and intelligent man, well ahead of his time. Click here to watch a humorous forward look by George in the late 1970’s.

6 Comments

  • we are approaching the dreaded september period for stock markets, do you think it will unwind some of the extremes we are seeing in technology & other sectors that have returned to significant prior resistance levels?

    Also if this was a cyclical bear in a secular bull as some have suggested can a bull market continue without the banks participating?

    Reply
    • Mark:
      1. Yes, there’s a decent chance of a correction especially in the tech sector and yes, seasonality can be weak Aug-Sept
      2. The reason banks tend to be “necessary” for a sustained bull market is their tie in to the economy. Banks do well when overall economic health is good–lots of borrowing at the commercial and retail level, lots of new issues for their investment banking division, lots of trading for their brokerages, lots of currency, etc moving. Low rates help banks. Right now, you have high rates, which has depressed banks. The reason I mention in my opening paragraph that financials are one of the sectors who cold do well later in the year is because the Fed will eventually signal a pause then a reduction in tightening–and banks will likely rejoice on the news.

      Reply
  • I always heard higher rates help banks.

    from investopedia

    “Interest rates and bank profitability are connected, with banks benefiting from higher interest rates. When interest rates are higher, banks make more money by taking advantage of the greater spread between the interest they pay to their customers and the profits they earn by investing.”

    Reply
    • You are correctly quoting the Investopedia site re their profits in spreads in a high rate environment. I have addressed that in the past. It works (their spread profits) to a point. However, the other side is their loan business, which slows in high rate environments. Rates can go a bit higher and they continue loaning but also make better spreads. But when rates escalate as they have (quickly)its not so good …. Proof is in the pudding–note how rates have risen over the last year, and banks fell.

      Reply
  • an addition to above comment.

    if rates get too high it could discourage borrowing. perhaps we are near that now.

    Reply
  • Based on both the analysis here and that of Brook Thackery, it’s time to raise some cash for August and September. Gold producers sound like a decent place to hide as mentioned in the valuetrend YouTube video.

    Reply

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