Monday, December 19, 2011

Crude Oil Price and S&P 500 Energy

The macroeconomic case for owning Energy stocks is weakening along with the price of oil. As global economic growth slows, so does the demand for oil. The price of oil is the key determinant of the performance of energy stocks relative to the S&P 500. The price of a barrel of Brent crude oil has been trending down in a volatile fashion since it hit a cyclical peak of $126.47 on April 8 of this year. This morning, it is down to $103.86. The S&P 500 Energy sector has been underperforming the S&P 500 since April 11.

Contributing to last week’s 4.7% drop in the price of Brent was news that US petroleum usage fell sharply in early December. I track the four-week moving average, which fell to 18.3 million barrels per day as of the week of December 9. That’s below the comparable readings for 2007 through 2010. The latest gasoline usage was 3.4% below the comparable year-ago pace, and gasoline inventories are the highest ever at this time of the year. (See our US Petroleum Weekly.)

Nevertheless, there is a case to be made for owning Energy stocks as a hedge against turmoil in the Middle East. On Friday, Bloomberg reported: “The US is concerned Iran is on the edge of enriching uranium at a facility deep underground near the Muslim holy city of Qom, a move that may strengthen those advocating tougher action to stop Iran’s suspected nuclear weapons program. Iranian nuclear scientists at the Fordo facility appear to be within weeks of producing 20 percent enriched uranium, according to Iran analysts and nuclear specialists in close communication with US officials and atomic inspectors. US officials, speaking on condition of anonymity, worry Iran’s actions may bolster calls for a military response and ratchet up pressure to limit Iran’s oil exports, which might send oil prices soaring.”

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