Taking stock of oil

05/11/22
  • Crude oil up more than 35% YTD despite recent consolidation
  • Oil disengaging from stock market as a whole?
  • Sustained strength could continue to support energy sector

Like the stock market, crude oil functions as a proxy for economic expectations: When the economy is humming—and investors expect more of the same—oil prices tend to rise, since busier companies and expanding economies demand more energy.

For example, the following weekly chart shows June WTI crude oil futures (CLM2) and the stock market rallied together for the better part of 22 months after their March 2020 lows as anticipation of an economic recovery from the COVID lockdowns progressed

Chart 1: June WTI crude oil (CLM2) and S&P 500 (SPX), 3/23/20–5/10/22 (weekly). June WTI crude oil (CLM2) and S&P 500 (SPX) price chart. 2022: Oil surged as stocks sagged.

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


But while the party ended abruptly for stocks early this year, crude oil prices kept rising into March. The final, high-momentum leg of the crude rally unfolded as Russia first threatened, then invaded Ukraine, triggering widespread concerns of energy market disruption.

Ongoing uncertainty may be reflected in the oil market’s sideways price action the past couple of months. After hitting $121.17/barrel on March 7, June WTI crude oil slid 25% over the next five trading days to hit a low of $90.37 on March 15. Since then, it’s traded entirely within that range, for the most part swinging in an increasingly narrow consolidation:

Chart 2: June WTI crude oil (CLM2), 11/15/21–5/10/22. June WTI crude oil futures (CLM2) price chart. Two-month consolidation.

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


While it’s reasonable to assume crude prices could retreat in the event of a conclusion to the invasion, it’s also fair to note that many people (including most “experts”) thought one was unlikely in the first place, and that the conflict has already dragged on much longer than most people thought it would.1 Also, the economic sanctions the US and other countries slapped on Russian energy markets will not necessarily disappear if and when Russia leaves Ukraine.

Aside from this factor, Morgan Stanley & Co. analysts recently argued that oil will continue to outperform the broad stock market, in part because energy demand remains high but supply growth has been slow—in part because of the reluctance of energy companies to invest in new fossil fuel production because of the larger transition to green energy.2

Of course, the “broad” stock market is one thing, and the energy sector is another. While the SPX was down around 16% for the year as of yesterday, the S&P energy sector was up more than 35%. If oil does, in fact, continue to hold its ground, it could provide sustained tailwinds for energy stocks.

Market Mover Update: With Starbucks (SBUX) drifting to fresh lows below $72 on Tuesday, the iron butterfly spread discussed in “Breakouts and butterflies” was up around 17% since April 21.

Today’s numbers include (all times ET): Mortgage Applications (7 a.m.), CPI (8:30 a.m.), Atlanta Fed Business Inflation Expectations (10 a.m.), EIA Petroleum Status Report (10:30 a.m.).

Today’s earnings include: Toyota (TM), Wendy's (WEN), Beyond Meat (BYND), Rivian (RIVN), Bumble (BMBL), Disney (DIS), Coupang (CPNG).

 

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1 CNN.com. A new realization dawns for Washington, Europe, Kyiv and Moscow. 4/29/22.
2 MorganStanley.com. Are Oil and Stock Prices Now Disconnected? 5/10/22.

Important note regarding economic sanctions. This event may involve the discussion of country/ies which are generally the subject of selective sanctions programs administered or enforced by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), the European Union and/or by other countries or multi-national bodies. The content of this presentation is for informational purposes and does not represent Morgan Stanley’s view as to whether or not any of the Persons, instruments or investments discussed are or may become subject to sanctions. Any references in this presentation to entities or instruments that may be covered by such sanctions should not be read as recommending or advising on any investment activities involving such entities or instruments. You are solely responsible for ensuring that your investment activities in relation to any sanctioned country/ies are carried out in compliance with applicable sanctions.

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