I mentioned my long-term expectation for lower commodity prices in this morning’s Macro Wrap. I promptly received a question about my thoughts on crude oil.
The 3 year chart of the front month WTI crude oil contract shows a market defined by a tightening range over the past couple years:
Oil’s chart is about as neutral as you can get. At 92.75, oil is trading just above its 200 day ma (in black) around 91.25. It’s also an equal distance from its descending trend line in the low 100′s and its ascending trend line in the low 80′s. It has held up better than most other commodities so far in 2013, though it’s a bit deceiving because Brent crude oil is actually down about 5% in 2013, while WTI, shown above, is 1% higher.
So oil the commodity seems rangebound, with no clear short-term direction. However, given rising inventories globally, and tepid global industrial demand, I do think it’s likely to move lower in the long run as well.
How about oil-related stocks? They’ve performed much better than the commodity itself in the past year, participating in the broader market rally. Here is the 3 year performance chart of XLE vs. WTI front month oil, illustrating the percentage gain in each asset since April 2010:
This performance gap really started to widen in the second half of 2012, and has continued into 2013 as well. Part of this is due to relatively cheap overall valuations in the energy sector compared to other cyclical sectors, and the value trade has been in vogue in the past 6 months (see health care’s strength). Part of it is simply due to stocks’ outperformance as an asset class. Yet, oil stocks are discounting a much more optimistic future than a year ago, when crude oil prices were in the same spot.
Materials and energy continue to be sectors that I would not touch on the long side with the overall commodity backdrop and global economic weakness. Many market signals are saying that these sectors just have too much supply relative to demand.