Oil, energy, and FOMO

06/07/22
  • Crude oil up roughly 60% in 2022
  • Energy sector has been S&P 500 standout
  • Oil’s price swings this year highlight advantages of patience

While no one has enjoyed the pain at the pump, the rallies in energy futures and stocks have no doubt been a bright spot for traders and investors lucky enough to have gotten in on these moves in their early stages.

For stock bulls, the pickings have been slim in 2022: Energy is one of only two S&P sectors in positive territory for the year (the other is utilities). Of course, that narrowly focused upside could increase the possibility that over-eager traders and investors will chase these stocks for Fear Of Missing Out (FOMO).

Or, perhaps more accurately, “FOMOO” (Fear Of Missing Out on Oil), because in the energy space, all roads eventually lead to oil. As of yesterday morning, July WTI crude oil futures (CLN2) and the S&P energy sector were both up more than 60% for the year, while the S&P 500 (SPX) was down roughly 13%:

Chart 1: July WTI crude oil (CLN2), S&P 500 (SPX), S&P Energy (GSPE), 12/31/21–6/6/22. Energy price chart. Oil up, stock market down.

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


Although individual oil companies do not always move in lockstep with oil, it’s not too much of a stretch to say that (so far this year), as goes oil, so goes the energy sector. And while oil prices near $120/barrel are at a level few analysts expected a year ago, Morgan Stanley & Co. analysts recently commented on the potential for more upside.

In a nutshell, on one side of the ledger Morgan Stanley points out the reduced demand because China has been buying less oil (amid shutdowns stemming from its zero-COVID policies), along with concerns about a larger economic slowdown. But on the other side of the equation, it sees the loss of Russian oil on the market—a trend it expects to accelerate in the second half of the year—as an even bigger constriction on supply.1

Translation: The reduction in oil supply will be bigger than the reduction in demand, hence their Q3 target price of $130/barrel for European Brent crude oil, which is currently trading around $118/barrel.  That’s a little more than $1/barrel above US WTI crude oil, which closed last Friday at its highest weekly close since July 2008—the month crude hit its all-time high:

Chart 2: July WTI crude oil (CLN2), 2/25/22–6/6/22. July WTI crude oil futures (CLN2) price chart. Risks of chasing oil momentum.

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


But as the chart shows, while July WTI crude oil futures rallied 38% between February 25 and last Friday (a period during which the SPX fell 6.3%), it was far from a straight line. The percentages show how much the market pulled back from each of its swing highs—never less than 5%, and as much as 21%.

For all its net gains, this has not been a market that has rewarded momentum chasers this year. It may have more upside for bulls, but if this chart is any indication, not the ones who charge in recklessly.

Market Mover Update: On Monday, the big movers in the energy space weren’t petroleum stocks, but rather their “clean” cousins: Several solar stocks, including Sunrun (RUN), SolarEdge (SEDG), and SunPower (SPWR), rallied 3% or more amid reports that the White House was planning to support US solar panel production by instituting a 24-month exemption from solar panel tariffs, among other policies.2

Today’s numbers include (all times ET): International Trade Balance (8:30 a.m.), Consumer Credit (3 p.m.).

Today’s earnings include: J.M. Smucker (SJM), United Natural Foods (UNFI), Cracker Barrel (CBRL), Dave & Buster's (PLAY), Verint Systems (VRNT), Casey's General Stores (CASY).

 

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1 MorganStanley.com. Midyear Outlook: European Energy & Growth Challenges. 5/19/22.
2 Reuters. Exclusive: Biden to waive tariffs for 24 months on solar panels hit by probe. 6/5/22.

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