Oil slump tests energy sector
- Energy sector weak despite sentiment tailwinds
- Multi-month consolidation tied to larger pattern
- Oil jumped Monday after Friday’s three-week low
The energy sector has been a soft spot in the S&P 500 (SPX) in recent weeks. That’s probably resulted in some head scratching among investors and market watchers, since energy was widely seen as a likely beneficiary of the incoming Trump administration’s preference for deregulation. However, over the past month, energy has actually fallen more than any sector besides health care.
On Monday morning, though, energy was one of only three positive sectors on a weak day for the SPX, and it wasn’t difficult to see why. Crude oil prices, which closed last week at a three-week low after Friday's 1.6% loss, jumped more than 2% intraday and closed up 1.4%:
Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)
That upside pivot occurred after the market approached the October–November lows (roughly $66–$67) that form the bottom of the choppy trading range that has been in place since prices pulled back from their early-October highs.
Last week also marked the eighth-straight week crude oil reversed the previous week’s move—that is, followed an up week with a down week, or vice-versa—which is a streak the market has matched or exceeded only three other times since 1986 (most recently in June 2023). Was Monday’s rally possibly a sign oil was on the road to extending that streak?
Before delving into that question, let’s take a look at the longer-term oil picture. The following chart of weekly spot (cash) crude oil prices shows the market is currently near a support level defined by lows dating back to March 2023:
Source: U.S. Energy Information Administration, www.eia.gov (For illustrative purposes. Not a recommendation.)
While the market has repeatedly rallied off this price zone, it has hugged it more closely in recent months, and the most recent rebound (off the mid-September lows) was the smallest since the level first began functioning as support.
As to whether the market’s Friday–Monday pivot represented the beginning of a full-week rebound, analysis of similar moves suggests a slight “bias” for additional short-term upside. Oil prices have followed 1.5%-or-larger down days that also marked three-week lows (Friday) with 1.4%-or-larger up days (Monday) 183 other times since 1986. The first chart highlights the two most recent examples (September 10-11 and November 15-18), both of which were followed by at least a few more days of upside. But the three cases that preceded these were all followed by short-term down moves.
Overall, four trading days after the two-day pivots, oil was higher in 93 cases and lower in 90. The average gain for the up moves was 5.3%, while the average loss for the down moves was -4.2%.1
In other words, how this week plays out may have implications for the oil market’s ability to hold its long-term support level, which in turn could play a significant role in the energy sector’s performance.
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1 All figures reflect spot WTI crude oil closing prices, 1986-2024. Supporting document available upon request.