Energy Stocks Forecasting Crude Oil Decline

Good morning! As I finish this up, I am back at the airport waiting to board an earlier flight than expected back home. I was hoping to sneak away for a few hours and race through 18 holes, but Mother Nature gave us so much rain that the golf course and driving range were closed. So rather than waste a full day, I booked an earlier flight on the always flexible Southwest Airlines. At the same time, my 8 year old called me and said, “Dad, will you please come home right away.” That made the decision a layup and I will surprise them when they get home from school.

The stock market ended the month with lots of yawns. It has been a downright boring week or so. Long time readers know that volatility compression leads to volatility expansion and vice versa. The longer it stays quiet, the bigger the move, perhaps in both directions, when the boredom ends. Very quietly, the defensive sectors have been showing the strongest price action. Utilities, staples and REITs are all at fresh 2017 highs with very little fanfare. If my four key sectors weren’t behaving so well, I would be much more concerned.

One area which has been somewhat of a head scratcher for me is energy. With crude oil trading well and close to new highs, as you can see below, you would think that the energy stocks should be somewhat strong and following suit.

However, that’s just not the case. The next chart below is the exchange traded fund, XLE, or the grand daddy of energy ETFs. After peaking in mid-December, it’s now down roughly 10% with Exxon Mobil at new lows and down almost 15%.

The oil service sub-sector is below and it, too, acts very poorly against the solid crude backdrop. Something just ain’t right.

With the stock market behaving very well and crude oil close to new highs, the energy stocks should be a market leader. They are not even a mid-level performer. Historically, the stocks are smarter than the commodity and lead. Couple that with extreme levels of smart money selling crude oil and you have the makings for a peak in oil and significant decline on the way.

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