Oil Stocks Correlated to Market?
Bloomberg reports Oil Stocks Negatively Correlated to Market First Time Since 2001
My chart suggests otherwise and Bloomberg’s chart in the article displays as a blank chart so we cannot see precisely what the author means.
The article notes “The energy index has climbed 39% this year while the broader index has fallen 6% and the S&P 500 Information Technology Index is down 10%. Analysts say the divergence has historically preceded recessions.”
These correlations are similar to the thesis that gold follows the dollar. On a day-to-day basis gold usually follows the dollar, but the relationship goes to hell over longer periods of time.
For example the US dollar index is now about 99. It was 99 in 2020, in 2017, 2015 and 2003. In 2003 gold was $310 with the dollar index at 99. No, gold does not follow the dollar.
From 2014 to 2019 energy mostly had an inverse relationship with the S&P 500.
In mid-2014 the RYE index was at 79.13. Pre-Covid it fell to the $36 level. Meanwhile the S&P 500 rose from 1600 level or so to the 2750 level.
It’s a huge stretch to make the Bloomberg headline.
Where To?
“The relationship will normalize again, most likely on the downside,” Stifel Nicolaus analyst James Hodgins said. “For energy prices to fall significantly, we could be talking about a recessionary type situation in which case the S&P 500 would also likely fall significantly and therefore the correlation would come into positive territory again.”
How About This Idea?
S&P 500 Energy’s historical weight in S&P 500. The historical average weighting is ~9%, we are currently at 3.7%. #OOTT #COM https://t.co/3pES16cnuK
— Gurgen Ayvazyan (@Gugo907) March 26, 2022
February is in, & here are the updated results for my energy portfolio vs major indices.
My biggest winner was $TELL with a 52.04% return, though it’s my smallest position.
YTD returns:
907 – 54.41%
S&P 500 – (8.23%)
Nasdaq – (12.1%)$NNRG – 34.89%$XLE – 27.17%$XOP – 21.95% https://t.co/iuyalj59Ai pic.twitter.com/iug6HD04oN— Gurgen Ayvazyan (@Gugo907) March 1, 2022
Recession? Demand Destruction?
I agree with the idea that a recession is coming. I also think stocks in general will get clobbered.
The question for oil stocks pertains to demand destruction vs supply chain disruptions.
The demand for oil is mostly inelastic. The elastic portion pertains to vacation travel. An inelastic downside risk comes from huge job losses. But will there be enough job losses to ease demand?
Might We See a Minimal Job Loss Recession? Why Not?
On march 21, I asked Might We See a Minimal Job Loss Recession? Why Not?
To recover jobs to the level they were at pre-Covid, the economy needs 152,504,000 minus 149,721,000 jobs (2,783,000).
But to recover to the trend the economy needs 6,279,000 jobs.
What Can the Fed Do About the Price of Food, Medicine, Gasoline, or Rent?
The answer is nothing or next to nothing. Rates hikes will not impact inelastic items.
For discussion, please see What Can the Fed Do About the Price of Food, Medicine, Gasoline, or Rent?
Bubbles Will Pop
If you think the Fed can fix decades of easy money and reckless Congressional spending while not remotely understanding inflation, you are only nuts.
Most People Have No Idea How Much Stocks are Likely to Crash
But energy is a demand destruction vs supply chain destruction issue, not just in the US, but globally.
Until recession hits, energy is a much better bet than the S&P 500 or technology stocks, and perhaps if not probably, even then.
This post originated at MishTalk.Com.
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What’s amazing is that the dollar has also gone up tremendously. That’s not normal. Were we living in another country and invested in gold we’d be even happier at what gold has done. The dollars rise has masked a good deal of the rise in gold for dollar users.
Shale oil wells produce a lot initially for a short time and then decrease rapidly. Most of those wells are aging and production is rapidly falling off, just as fast as they ramped up. Actually, faster, though it will level off to a slow trickle for a long time for most.
And…..all of the best spots are already taken. Future oil wells will be on 2nd tier land, not 1st tier. Even with a massive ramp up in drilling it will only keep the oil production there from falling. Apart from new tech (which keeps surprising to the upside) or a massive new discovery somewhere, oil prices will stay high for a very long time.
Oil production virtually everywhere else in the world is falling. Oil production has only grown because of oil shale, which has largely peaked, or will in a year or two. When they begin to see falling production too, I doubt very much if tiny Guyana or Canada Oil Sands can keep up.
Oil may fall to 50, as you say, but it will be a very temporary thing.
I mentioned if you had included in your calculations the rapid decline of shale oil wells and how those wells that were drilled during the boom a few years back are now in irreversible decline?
The Permian Basis has already had all the good spots drilled, and, unfortunately, it is SHale oil by itself that allowed the world to increase production.
Since there have been no new discoveries developed the last few years and oil takes years to develop, we are in for a rough few years. Can it go back to 50? Yes, but not on fundamentals. We are currently depleting our inventories by 1.5 million barrels a day, not even including Russia.
It will take a very bad recession indeed to create enough demand destruction to offset that.
Where will they pump? Everything that is pumpable already is being pumped and oil production, even with high rates of drilling, is still slowing falling in the USA by 7 million barrels a week, not even including the Russian import ban, which will increase that further.
That’s the problem. The average American is clueless about the state of shale oil and how rapidly shale oil wells decline.
There are plenty of spots left to drill, but they are all 2nd tier, meaning it takes far more of them to offset the decline in existing wells that were tier 1.
It’s not going to be pretty.
Geology matters.
I suspect that Namibia is going to have major infrastructure issues with developing any significant oil production. That means their production is like 10 years out at best.
In the meantime, how much of a decline in production will the world face elsewhere? Capex is nada lately and that means in 10 years there’s going to be massively higher oil prices.
Of course, a breakthrough in technology can save us.
I’m particularly interested in thorium reactors (my dad actually helped work on this project). I have no idea why they aren’t being used yet since they work, are safer than normal nuclear, and are very clean.
And of course if fusion reactors ever become a thing, we’re all going to be driving EV’s immediately after for almost free, assuming we can find the metal to make teh batteries with.
And buyouts, takeovers and consolidation do not result in more oil.You are speaking about beaucracy. What matters is oil out of the ground. Oil inventories do not care who owns them.
But to find the oil it takes exploration. Look at the exploration budgets for the oil companies the last 8 years. They are almost non-existent.
That says it all. We are in for a rough ride.
And if the recession is not that hard to destroy 4-5 million barrels of demand? Well, I’ll double my money (or quadruple it).
Either way, I’m better off.
As the price differential increases, and it will, more oil products will leave the USA for Europe to capitalize on that price spread. That’s a continued drag on inventories.
We’ve cut Russian oil out, we are already on our own losing 1-1.5 million barrels a day in inventories, and we’ll likely lose another .5 million barrels to exports.
It will take a COVID like shut down to off set that.