Market Commentary

Contact Us

Energy Market Update

by Tyler Ellegard


Posted on June 10, 2019

As we have gone through the year, we have seen significant volatility in the energy markets.  Historically, oil prices are consistently more volatile than the overall stock market as the price per barrel can shift rapidly and aggressively based on sentiment shifts with the macroeconomic environment.  Although the companies within the Energy sector also tend to be more volatile relative to the broader stock market, they tend to be less volatile than Oil and Gas prices, and this year has been no different.

From the start of 2019 to the end of April, West Texas Intermediate (WTI) Crude Oil was up approximately 40% while the broader Energy Sector was up 16%; since then, WTI Crude Oil has declined over 15% while the Energy Sector has declined 7.3%.

An important factor in the price of energy markets is the level of inventory for oil, providing some indication of the level of supply and demand that can affect future prices.  Every week, the US Energy Information Administration provide an oil inventory report that gives a indicator of supply/demand levels. Throughout the month of May and beginning of June, the data was not favorable, showing that inventories had increased.  To investors in the energy market, this tells one of two stores:

  • Decreasing demand from countries that import Oil or,
  • Increasing production without an equal increase in demand

Those two factors can cause a decline in the current price of oil, which is significant for the energy markets because it can be implied that energy companies will produce less revenues and be less profitable as costs stay relatively constant. 

As we look forward, the price of WTI Crude Oil has been reacting to trade discussions with China, and may continue to be weak if discussions worsen or drag on.  China is the world’s largest importer of oil and their imports dropped 8% in May going from 43.73 million tonnes in April to 40.23 tonnes in May.  However, OPEC, Organization of the Petroleum Exporting Countries, will come together on June 25th for their monthly meeting and they will discuss whether or not they should increase or cut their production.  If OPEC elects to cut production, that will have a positive effect for the energy markets and could potentially offset China’s decline in imports.

Our expectation is that oil will remain volatile until we have more clarity on trade discussions with the US and China.  However, many companies have set their annual budgets for 2019 based on crude in the $50 to $55 per barrel range, and should be able to withstand this recent price correction.  Valuations of energy companies appear reasonable, but earnings power will be dependent on stabilization to improvement in Energy prices from current levels. 

 

 

*Charts Source: Stockcharts.com


Related Posts

Have We Landed the Plane?

March 1, 2024

Read More

Starting Off On The Right Foot

February 1, 2024

Read More

A Year of Surprises... Now What?

January 2, 2024

Read More

What A Difference A Month Makes

December 4, 2023

Read More

The October Respite Never Arrived

November 2, 2023

Read More

Interest Rates Take Center Stage

October 2, 2023

Read More