Energy Continues To Outperform The Stock Market
Crude oil, natural gas, and coal prices have soared from the 2020 lows. In April 2020, nearby NYMEX crude oil prices fell to the lowest level in history when the expiring contract fell below zero to negative $40.32 per barrel. The Brent futures dropped to $16 per barrel, the lowest price this century. Natural gas reached a quarter-of-a-century low of $1.44 per MMBtu in June 2020, and thermal coal for delivery in Rotterdam dropped to $38.45 per ton in April 2020.
Since then, prices have exploded higher, with oil and gas reaching the highest prices since 2008. Coal and oil product prices have reached new record levels as the fossil fuel price implosions of 2020 turned into explosions in 2022.
The companies that extract hydrocarbons from the earth’s crust are experiencing a profit bonanza, even as the overall stock market has become a falling knife. After lagging the stock market for years, traditional energy companies have become the leader, posting gains as the rest of the stock market falls. The trend is always your best friend in markets, and the bull market in traditional energy looks set to continue.
Oil is consolidating and building cause for higher highs
- Nearby July NYMEX crude oil futures were at just over the $115 level on May 27.
- Nearby July Brent crude oil futures were trading at $119.43 at the end of last week.
- While crude oil did not make a new record high in 2022, gasoline and distillate fuels rose to new all-time peaks before correcting.
- Oil and oil product prices are digesting the recent highs and consolidating at the highest prices in years.
US natural gas could head for the $10+ level before the end of 2022
- Nearby NYMEX natural gas futures were at the $8.727 per MMBtu level on May 27, after trading to the highest level since 2008 and reaching $9.447 last week.
- The volatile hurricane season runs through the summer and can cause price spikes when storms threaten the US Gulf Coast.
- European and Asia natural gas demand and prices have been explosive.
- According to the US EIA, natural gas stocks are low- 17.6% below last year and 15.3% under the five-year average as of May 20.
US energy policy continues to support prices
- The Biden administration continues to address climate change with policies that support alternative and renewable fuels and inhibit fossil fuel production.
- The administration has asked OPEC+ to increase petroleum output- The cartel has refused more than once.
- Daily US crude oil production at 11.9 mbpd is below the March 2020 record high of 13.2 mbpd.
The war in Ukraine and OPEC policy make higher highs probable
- US energy policy increased OPEC and Russia’s pricing power in the international petroleum market.
- Sanctions and retaliation are limiting or stopping the flow of natural gas from Russia to Europe via the pipeline system.
- Crude oil, natural gas, and coal have become political tools of war for Russia and “unfriendly” countries supporting Ukraine.
- The trends in oil, gas, and coal prices remain higher in late May 2022.
The index and ETFs that will appreciate with traditional fossil fuel prices
- As of May 27, 2022, the S&P 500 index, the most diversified US stock market index, was 12.8% lower in 2022.
- The S&P 500 Energy Sector SPDR (XLE) was 59.5% higher in 2022.
- The S&P Oil and Gas Exploration and Production SPDR (XOP) was 63.8% higher than the closing price on December 31, 2021.
- The VanEck Oil Services ETF product (OIH) was 62.8% higher than at the end of 2021.
- Traditional oil and gas investments are trending higher, while the US stock market is in a bearish trend in late May 2022.
Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!