Tapping into the oil surge

  • Crude oil prices +20% in little more than two weeks
  • Latest jump occurred after surprise OPEC production cut
  • Market slowed Tuesday as prices probed Feb.-March highs

After essentially carrying the bullish flag by itself last year, the energy sector has struggled so far in 2023, down roughly 3% vs. a 6%-plus gain for the S&P 500 (SPX).

Recently, though, the sector has had a much more “2022” feel. On Tuesday morning, energy was the top-performing S&P 500 sector over the past five trading days, up around 6%:

Chart 1: S&P sector five-day returns, 4/4/23. Energy back on top.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)

As noted here roughly a month ago (when the energy sector was down more for the year than it is now), energy stocks weren’t getting much help from their underlying commodity, crude oil, which had been stuck in a multi-month trading range (see “Energy sector seeks oil momentum”).

That changed dramatically last month when crude first broke the bottom of that consolidation, falling to its lowest level since November 2021:

Chart 2: May WTI crude oil (CLK3), 1/11/23–4/4/23. Crude oil futures price chart. Up more than 20% in less than three weeks.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)

Since March 17, though—just four days into the downside breakout—May WTI crude oil futures (CLK3) have jumped as much as 21%, thanks in part to a surprise OPEC production cut that helped send the market more than 6% higher on Monday.

Although the energy sector has hitched its wagon to the oil rally over the past couple of weeks, the following chart shows individual moves have varied widely. Exxon Mobil (XOM) has tracked oil prices fairly closely since mid-January, while Schlumberger (SLB) sold off much harder in March, and has yet to recover:

Chart 3: May WTI crude oil (CLK3), Exxon Mobil (XOM), Schlumberger (SLB), 1/11/23–4/4/23. Oil stocks price chart. Stocks bounced with oil.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)

Taking a step back to view the larger picture, the recent oil surge has prompted concerns that higher energy costs could make it more difficult for the Federal Reserve to keep inflation under control, which some analysts think could lead to more interest rate hikes—a potential negative for the stock market overall.

On Tuesday, oil had trouble adding to Monday’s rally—prices edged to a slightly higher intraday high of $81.81 before drifting into the lower half of the day’s range. Meanwhile, Morgan Stanley Research actually lowered (slightly) its year-end oil price target in the aftermath of the OPEC announcement, because so far this year, demand has been weaker and supply more plentiful than previously anticipated.1 They now think it’s more likely Brent crude oil prices (currently trading roughly $4–$5/barrel above WTI oil prices) will reach $90/barrel by the end of this year instead of $95. In other words, the OPEC production cut may not represent a seismic shift in the market’s overall supply-demand picture.

Today’s numbers include (all times ET): Mortgage Applications (7 a.m.), ADP Employment Report (8:15 a.m.), International Trade in Goods and Services (8:30 a.m.), PMI Composite Final (9:45 a.m.), ISM Services Index (10 a.m.), EIA Petroleum Status Report (10:30 a.m.).

Today’s earnings include: Conagra (CAG), Schnitzer Steel (SCHN), Simply Good Foods (SMPL).


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1 Morgan Stanley Research. OPEC Cut Offsets Underlying Weakening. 4/3/23.

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