Energy Stocks Continue to Lead the Way in 2021
The S&P 500 Energy Sector led U.S. stocks in May and again the first week of June. Up 47% since the end of the year, it’s the top sector so far in 2020. The rally puts the group at new 52-week highs and above significant resistance formed by bottoms in 2016, 2018, and 2019.
On a relative basis, Energy has been in a long-term downtrend since 2008, with the most recent low set in the fall of 2020. By this measure, the sector is still below its March peak, but, importantly, prices are breaking above a 3-year downtrend line for the first time.
As a reversal indicator, trendlines have a mixed record – a trendline break is not an infallible sign of a trend change. At the same time, you can’t have a trend change without breaking trendlines. In this instance, the case for a new relative uptrend in Energy stocks (as opposed to a mean reversion within an ongoing downtrend) is strengthened by a textbook momentum divergence at the 2020 lows.
Confirming – and contributing to – the recent strength in Energy is oil’s continued surge. The price of WTI reached the highest level since 2018 last week, thanks to a widening supply/demand imbalance as the global recovery continues.
In May, the International Energy Agency adjusted its consumption outlook for the coming years: it now expects global demand for crude oil will return to pre-COVID levels sometime next year, as opposed to the prior estimate of 2023. Meanwhile, OPEC and its allies have flexed their mighty muscles over the last 12 months, keeping global inventories largely in check through an array of voluntary production cuts. Even as they bring capacity back online this summer, OPEC expects demand to exceed global supply well into the second half of the year – whether Iran manages to garner sanctions relief or not.
In the decade past, it seemed at times that OPEC’s grip on the world’s oil market was slipping. That’s because innovations in U.S. shale regions made domestic crude oil cheaper and more plentiful than ever. Even after crude prices peaked in 2014, U.S. production continued to rise and was setting new highs just before the pandemic. But the ensuing crisis hardened the resolve of those who’ve long sought to instill discipline on shale drillers. U.S. oil executives are now increasingly focused on maximizing cash flow and capital return, not taking on debt to maximize output, so even though oil prices have fully recovered, production hasn’t budged:
They say the cure for high commodity prices is high commodity prices. If crude oil continues its march higher, we’ll get to see just how ‘disciplined’ all these producers really are.
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