Oil and Equities Diverge. Will this New Path Make a Difference?
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Oil and equities often move together. Intuitively, this makes sense. Both are risk assets, and both get bought or sold by traders depending on the level of risk appetite in the market. What’s more, economic fears of a recession tend to bring down both equity indexes and the price of crude oil.
So, the recent divergence is notable. The Dow lost over 1,000 points on Friday, spooked by U.S. Federal Reserve Chair Jerome Powell’s hawkish Jackson Hole Speech. As for crude oil? It rose, despite the carnage in stocks.
Maybe we’re seeing the start of a trend: Oil as risk-off asset with a negative correlation with equities. Then again, the market sometimes offers up the possibility of tantalizing divergences, only to pull the rug.
Source: StockCharts.com
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With so many possible scenarios that could play out in the coming months, the oil & gas industry is poised to see more volatile patterns, even if it manages to maintain its overall upward momentum. For traders, having a couple of different plays in your back pocket to bring out in response to whatever happens to the market could be a good idea.
Direxion’s Daily S&P Oil & Gas Exp. & Prod. Bull (GUSH) and Bear (DRIP) 2X Shares can help traders maintain that adaptability to a market that could become more volatile this year. Both track the S&P Oil & Gas Exploration & Production Select Industry Index (SPSIOPTR) and offer 200% daily leverage, or -200% daily leverage, respectively.
A GUSHing Case for the Bulls
The bull case for oil largely rests on supply. On the domestic front, the amount of oil held in the U.S. Strategic Petroleum Reserve (SPR) is at its lowest level since 1985.* This follows a 6-month planned release of 1 million barrels/day (which started in March) to lower energy costs in the face of Russia’s war in Ukraine. In the short term, these releases weighed on prices. But as we near the end of the SPR drawdowns, the market anticipates that the additional supply will soon be a thing of the past.
SPR releases have led to commercial crude inventories being higher than they otherwise would have been. As a result, traders of oil stocks should closely monitor the weekly Energy Information Administration (EIA) storage report. Every Wednesday at 10:30am ET, the EIA releases its report on the level of U.S. commercial crude inventories. The data has surprisingly pointed to the downside recently, and a continuation of this trend would be music to the bulls’ ears. Surprise builds in inventories, on the other hand, should pressure prices.
Meanwhile, on the foreign front, OPEC looks like it intends to support prices. Last week, Saudi Arabia signalled a willingness to cut production along with its cartel allies. This would help to counteract the increased supply that would come if Iran inks a nuclear deal with the West and increases its production and exports as a result. Traders should carefully watch OPEC’s movements. The September 5th OPEC meeting saw the agreement to cut production by 100,000 barrels/day. Their decision will certainly effect oil & gas producers in the weeks to come.
Traders wanting to bet on higher crude oil prices leading to a bullish environment for exploration and production stocks in the weeks ahead can utilize the Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 2X Shares (GUSH).
A DRIPping Case for the Bears
Oil’s recent rally is impressive, but the bull case is no slam dunk. For one thing, part of the rationale for OPEC to curtail production is it expects the market to be in surplus this quarter due to reduced demand growth and rising supply from producers outside the cartel. Weak demand is the big problem. Whether it’s a possible U.S. recession, faltering European economies, or a hard landing in China, global growth is not exactly on the ascent. The trading road is sure to be bumpy.
*https://www.reuters.com/business/energy/us-crude-spr-hits-lowest-level-since-january-1985-2022-08-22/
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