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Decoding the Energy Market’s Mood Swings

By John Persinos on February 9, 2017

Energy investors seem downright manic-depressive lately, with the broader indices along for the ride. The stock market and oil prices continue to move largely in tandem, which makes it important for all investors to understand the reasons for the energy sector’s volatility.

Year to date, the benchmark iShares US Energy ETF (NYSE: IYE) has declined 4.7% and the iShares US Oil Equipment & Services ETF (NYSE: IEZ) has fallen 1.7%, compared to a gain of 2.5% for the S&P 500. For full-year 2016, the IYE gained 22.9% and the IEZ 25.6%, compared to about 10% for the S&P 500.

So far this year, oil prices and energy stocks have been pushed down by disappointing earnings reports from energy companies, concerns about a stubbornly high global oil glut, worsening political strife around the world, and sputtering economic growth in the U.S. and overseas.

Two reports this week ostensibly confirmed the bearishness.

Data released Wednesday from the U.S. Energy Information Administration showed that last week commercial reserves soared by 13.8 million barrels to 508.6 million barrels. The expectation was for an increase of only 2.5 million barrels.

A day earlier on Tuesday, the American Petroleum Institute reported the second-largest weekly inventory build ever in the history of records, at 14.227 million barrels, compared to projections of an increase of 2.38 million barrels.

The oil price paradox…

In the wake of these two negative reports, oil prices and energy stocks as a whole went… higher. Yep, you read right.

On Wednesday, West Texas Intermediate crude, the U.S. benchmark, rose 0.44% to close at $52.40. Brent North Sea crude, on which international oils are priced, rose 0.25% to settle at $55.19. So, what gives?

If anyone can explain this paradox, it’s Robert Rapier. As chief investment strategist of The Energy Strategist, Robert can decipher the nuances of the energy markets in ways that elude the yabbering pseudo-experts on CNBC. As Robert says:

“Until OPEC’s late November announcement that the oil exporters’ club would cut production in order to balance the energy markets, crude prices had spent most of 2016 below $50 a barrel (bbl). Since that announcement, prices have been consistently above $50.

But there are plenty of skeptics who doubt the price of oil will go much higher in the short term, or even hold above $50. They cite two factors that could render the OPEC cuts ineffectual. The first is simply that OPEC members cheat, as they have historically done.

But the second factor cited by skeptics is beyond OPEC’s control, and that is that U.S. shale oil producers will simply ramp up production as oil prices rise, negating the OPEC cuts. That’s a reasonable concern…”

As energy investors showed on Wednesday, traders often sell the fact and buy the rumor. But there’s no escaping the fundamentals, which aren’t encouraging.

Shares of exploration and production companies, as well as oilfield drilling and services firms, were bid up to unwarranted heights in the second half of 2016, as energy investors long starved for growth piled in. The most unrealistic expectations are in oilfield services, which still grapples with weak balance sheets.

As the unpredictable Donald Trump continues to unsettle the status quo, the many dangers facing the energy sector are becoming all too apparent. For starters, a strong U.S. dollar and OPEC squabbling (as well as cheating) will put downward pressures on the energy market.

The U.S. economy still boasts many bright spots, notably falling unemployment, rising home prices and robust consumer spending. However, as the latest inventory statistics showed this week, growth isn’t sufficient to make a substantial dent anytime soon in the massive global oil glut. Meanwhile, the debt bomb in the oilfield equipment and services sector is ticking.

If the majority of analysts are accurate and an economic recession hits the U.S. in 2017, a sharp correction in oil prices would ensue.

As always, Robert and his team will keep close tabs on the volatile energy markets and help subscribers profit no matter how the energy equation shakes out.

Who’s paying the bill?

I got this letter from a reader:

“How does Trump plan to pay for all his good ideas? I see no way of doing it without adding more massive debt to the nation.” — James B.

James, it’s true: President Trump has vowed to significantly increase spending on defense and infrastructure, while at the same time cutting corporate and personal income taxes — all without increasing the nation’s debt. It’s starting to dawn on Wall Street that although Trump is delivering on his promises of deregulation, he’ll face difficulty getting his spending proposals through a Congress that’s driven by the GOP’s fiscal hawks.

Make no mistake, though: Trump’s infrastructure proposal isn’t a traditional prime-the-pump federal spending plan. At first, the logical assumption among investors and policy wonks was that his plan to repair the nation’s airports, bridges, roads, and sewage treatment plants would be in the model of liberal, Keynesian stimulus.

Upon closer inspection, however, this isn’t the case. Acting on tax incentives provided by Uncle Sam, private companies would independently fund, build and own these projects. Presumably, some of Trump’s friends in the construction business would see contracts steered their way.

Regardless, construction firms stand to benefit under a Trump presidency, although not quite in the way that many people assume.

Got a question or feedback? Drop me a line: — John Persinos

High velocity is your friend…

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Here’s What’s Really Going to Crush the Market

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