It has been hard to ignore oil's poor performance recently... but things could be changing soon. Overall this year, the global price of Brent crude oil has struggled. In only the past six months, it's down about 14%. And it's roughly flat year to date...
Why I'm Closely Watching the Oil Market
By Vic Lederman, editorial director, Chaikin Analytics
It has been hard to ignore oil's poor performance recently... but things could be changing soon.
Overall this year, the global price of Brent crude oil has struggled. In only the past six months, it's down about 12%. And it's up roughly 4% year to date... which pales in comparison with the S&P 500 Index's 21% gain so far in 2024.
Oil has done poorly this year for two key reasons...
The first is China. It's the world's second-largest consumer of oil. And it's the world's largest oil importer.
In fact, China imports 82% of the nearly 17 million barrels of oil it consumes daily.
But China's economy has slowed this year. Its property market is struggling. And that affects demand in a wide range of industries.
China's manufacturing industry has also been contracting since May.
Moreover, China is moving away from gasoline-powered cars faster than any major economy.
In August, more than half the new passenger cars sold in China were electric or hybrid. That's the first time these types of vehicles outsold traditional ones.
The second reason for oil's poor performance is a slowing global economy.
High interest rates have weakened economic activity in Europe and Asia. And recently, global oil demand was projected to grow 200,000 barrels per day less than previous estimates.
Given this backdrop, it's not surprising that investors haven't been interested in oil for most of this year. Since the start of 2024, the SPDR S&P Oil & Gas Exploration & Production Fund (XOP) is only up about 3%. That's big underperformance compared with the S&P 500.
But looking ahead, the two key reasons why oil has done so poorly this year could be fading...
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Regular Chaikin PowerFeed readers will recall that I recently discussed a massive series of stimulus measures from the Chinese government. As I said last month regarding these...
One is a large 50-basis-point ("bps") cut to banks' reserve requirement ratio ("RRR").
This refers to how much in deposits that a bank must keep as reserves and can’t lend out to borrowers.
That 50-bps cut alone is enough to free up an extra $140 billion-plus in deposits to be lent out. And the Chinese government hinted at a possible additional cut of 25 to 50 bps later this year.
And that's not all. As I continued...
The support package also includes a 50-bps cut for average interest rates for existing mortgages. Another measure is a reduction in the minimum downpayment ratio on second mortgages from 25% to 15%.
Meanwhile, the Chinese government is also handing out vouchers to citizens. These can be used on things like home appliances and food.
Put simply, these stimulus measures are a powerful jolt to the world's second-largest economy.
Meanwhile, here in the U.S., the Federal Reserve announced a huge 50-bps interest-rate cut last month. It's the first rate cut since 2020.
That coincided with a fresh round of rate cuts from Europe to Asia.
Interest-rate cuts bring down the cost of borrowing money. This promotes spending among businesses and consumers.
For countries in Asia already growing at a good pace, rate cuts add fuel to the economic engine.
These two developments are longer term in nature. Their effects on the economy – and underlying oil demand – take time to realize.
But now, there's a wild card in the oil market...
As you surely know, the conflict in the Middle East has been worsening.
It's a devasting, tragic situation. Israel and Iran are now at each other's throats. And disruptions to Iran's oil production are a big deal.
Back in 1979, the Iranian Revolution caused the country's oil production to plummet. Its production fell by more than 4.5 million barrels per day, or about 7% of global production.
That supply shock sent the price of oil doubling in a year.
Today, Iran produces almost 4 million barrels per day. That's down about 40% from the pre-revolution peak.
But it's still one of the world's largest oil producers. And the loss of even half of that production will have a major impact on the global supply-demand balance.
Something like this may have seemed very unlikely a few weeks ago. That's not the case anymore.
Oil prices have already been rising over the past week due to the increasing tensions. And a major Israeli attack on Iranian oilfields or infrastructure could send prices even higher.
To be clear, the Power Gauge is telling us to stay away from oil right now. It currently gives XOP a "very bearish" rating. And the fund has been in "bearish" or worse territory for most of the past few months.
Despite this, it's worthwhile to keep this sector on your radar...
Oil prices have a long history of soaring on the back of Middle East supply disruptions. The next major disruption could be right around the corner.
So I'm watching the oil and energy markets closely. And I recommend you do the same.
Good investing,
Vic Lederman
Market View
Major Indexes and Notable Sectors
# Hld: Bullish Neutral Bearish
Dow 30
+0.82%
10
17
3
S&P 500
+0.89%
159
279
59
Nasdaq
+1.19%
22
62
16
Small Caps
+1.4%
535
1007
376
Bonds
-1.23%
Financial
+1.74%
41
27
2
— According to the Chaikin Power Bar, Large Cap stocks and Small Cap stocks are Bullish. Major indexes are mixed.
* * * *
Sector Tracker
Sector movement over the last 5 days
Energy
+6.87%
Financial
+1.15%
Utilities
+1.11%
Communication
+0.97%
Industrials
+0.5%
Information Technology
+0.08%
Health Care
-0.9%
Discretionary
-1.33%
Real Estate
-1.74%
Materials
-1.81%
Staples
-1.87%
* * * *
Industry Focus
Dow Jones REIT Services
36
53
11
Over the past 6 months, the Dow Jones REIT subsector (RWR) has outperformed the S&P 500 by +3.26%. Its Power Bar ratio, which measures future potential, is Very Strong, with more Bullish than Bearish stocks. It is currently ranked #10 of 21 subsectors and has moved down 3 slots over the past week.
Top Stocks
ONL
Orion Office REIT In
AAT
American Assets Trus
NXRT
NexPoint Residential
* * * *
Top Movers
Gainers
ALB
+8.25%
UAL
+6.47%
DECK
+6.39%
AAL
+6.38%
DFS
+6.25%
Losers
EXR
-3.87%
EFX
-3.37%
DHI
-2.93%
MHK
-2.56%
LEN
-2.49%
* * * *
Earnings Report
Reporting Today
Rating
Before Open
After Close
No earnings reporting today.
Earnings Surprises
No significant Earnings Surprises in the Russell 3000.
* * * *
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