Friday, May 31, 2013

Energy: Stocks vs. Commodity

I am always interested in tracking equities in a sector that have an associated underlying commodity. It can be revealing to observe emerging divergences.

The chart below shows light sweet crude oil (WTI) versus RYE, the Guggenheim S&P 500 Equal-Weight Energy ETF:

Source: Stockcharts.com

I prefer to use the equal-weight ETF as it allows for a less XOM-dominated depiction. As you can see, energy equities as per RYE (black line) are approaching a new high whereas crude oil (red line) remains quite subdued at around $94, creating a fairly significant divergence.

Over the years, I've often debated which tends to lead, equities or the underlying commodity. Although clearly they move more or less in tandem, I've come to conclude that equities tend to lead the commodity. Note in the chart above equities moved ahead of WTI in early 2007, the peak in 2008 and again in late 2010. 

Assuming this tendency holds up, I would expect that with the RYE flirting with new highs, the multi-month divergence between energy equities and crude oil will be closed via the commodity (WTI) rallying from here.

9 comments:

  1. I think you may want to take a look at a 50/50 weighted NG/CL instead of a straight CL and see if the divergence is as strong. Also remember that companies hedge. CL is an unhedged price.

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  2. one thing you might want to consider is the shift to brent as worldwide oil price. WTI oversupply from bakken has caused brent-wti spread to blow out and keep wti low even while brent rallies. If you compared brent, you might see the international company equities line up w brent.

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  3. Another point to consider is that shale E&Ps have growth rates that are high on a historical basis due the new growth opportunities in the Bakken and Eagle Ford. In an environment where E&Ps are growing bopd are low single digits, you get a fairly tight relationship between WTI and an oil equity index. When growth rates become substantially higher, divergence should occur as E&P executes and investors begin to price in this growth.

    Make 2-3 composites: A shale focused composite (EOG, CLR, CHK etc), a non-shale focused composite, and an integrated oil composite. See if one group is diverging faster than the others...

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  4. Great Blog for comparison Stocks vs Commodity.

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  7. Sweet crude oil has plenty of demand in global markets. For this here we give opportunities for every sweet crude oil suppliers to bring more business in their desired placed.

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