As today’s MarketMinder Chart of the Day shows, around the world Energy stocks have fallen and they can’t get up.
In the graph, we indexed US Energy stocks’ returns versus the S&P 500 and global Energy stocks against the MSCI World Index to 1 at December 31, 2013—before last year’s price collapse. When the lines are rising, Energy stocks are outperforming. But that has been infrequent, particularly since last June. And the recent rebound from March 13 through early May is looking more and more like a dead-cat bounce.[i]
Exhibit 1: Energy Sector Relative Performance
Factset, as of 6/5/2015. MSCI World Index and MSCI World Index Energy sector net returns, 12/31/2013 – 6/4/2015. S&P 500 and S&P 500 Energy sector total returns, 12/31/2013 – 6/4/2015.
Since last year, we’ve seen frequent calls suggesting you pile into Energy now on the cheap, expecting a big bounceback. We disagreed then and still do now. And, as noted, there was a temporary bounce. But getting any benefit from this would have required super-precise timing. Sure, Energy stocks will shine eventually, but we don’t expect that soon.
Energy’s troubles are fundamental—tied to vast increases in supply outpacing demand growth. This is depressing oil prices, and Energy firms’ revenue and earnings growth hinges on prices. While prices have bounced up some since lows seen in early 2015, they’ve flattened out since mid-April.
Why mention this now? It is particularly pertinent given the news the Organization of Petroleum Exporting Countries (OPEC) will keep production stable at 30 million barrels per day.
OPEC to Maintain Current Oil Output
Grant Smith, Maher Chmaytelli and Nayla Razzouk, Bloomberg
OPEC’s move again signals they won’t act to support prices. And hey, that’s just the production quota—as this report notes, OPEC has typically slightly exceeded the quota in the last 12 months. What’s more, Iran, Iraq and Libya all appear set to ramp up production this year.
Iraq is set to increase exports by about 100,000 barrels a day this month as fighting with Islamic State militants spares its biggest-producing regions, Oil Minister Adel Abdul Mahdi said in a June 3 interview at the OPEC International Seminar in Vienna.
Iran’s oil minister, Bijan Namdar Zanganeh, delivered a letter to the group telling them to make room for the country’s rising output. The Persian Gulf nation is negotiating rolling back its nuclear program in exchange for relief from Western sanctions, which would allow it to boost oil production and exports.[ii]
It is widely anticipated Libya will also get two major oil terminals, Ras Lanuf and El Sidra, on more solid operational footing this year, after being plagued off and on by war, unrest and power outages.
All three of those countries are in desperate need of cash, which suggests their interest is in pumping, regardless of OPEC quotas. Maybe the Saudis dial down output, but their moves over the last year suggest they are putting their market share first.
Even outside OPEC, US shale oil firms have taken rigs offline, but the pace is slowing as prices stabilize. What’s more, the “fracklog”—wells drilled to a point weeks from completion—is estimated to hold hundreds of thousands of barrels per day in potential output. A surge in US output appears to stand at the ready, merely awaiting slightly higher prices.
The supply overhang plaguing oil prices—and hence, the Energy sector—isn’t likely to abate soon. Bottom fishing today still seems premature.
[i] This is not our term, and the brutal imagery isn’t our creation, so please don’t sic the PETA people on us. It is an industry term suggesting that the rebound hasn’t proven sustainable.
[ii] “Whatever OPEC Decides, Oil Supplies Are Rising From All Sides,” Rupert Rowling and Isaac Arnsdorf, Bloomberg, June 5, 2015.