Oil and oil stocks have rallied on some new developments, and it may be difficult to see big gains from now on.
As both supply and demand are bullish,WTI Crude OilPrices have risen more than 20 percent from lows in early March to around $82 a barrel.
Investor concerns over the health of the banking system eased, in turn boosting confidence in the economy, as the Federal Reserve’s campaign to combat inflation also appeared to be coming to an end, sweeping up consumption of gasoline and other fuels. obstacles in the way.
On the supply side, OPEC announced earlier this month that it will cut production by another 1.16 million barrels per day from May to the end of this year. Russia has also decided to extend its production cut of 500,000 barrels per day until the end of this year.
Rising oil prices sent the SPDR Energy Select Sector ETF (XLE-US) rose 14 percent to around $87.
Oil stocks usually rise faster than the price of oil itself, because many producers have fixed costs, so that the rise in crude oil prices can directly turn into profits, but this is not the case, because before the sharp rise in crude oil, oil stocks have been affected by Russia Invasion of Ukraine in early 2022.
The oil ETF trades at roughly 3 times its October 2020 low, and oil has so far only traded at 2 times that price, so the recent rally in oil stocks has been slower than the price of oil itself.
Today, the rally in oil and oil stocks is close to exhaustion, which does not mean that it cannot rise from now on, but that the rally is clearly limited and there is a great downside risk.
WTI Crude OilA key point for price action is in the low-$90s a barrel range, where oil prices lost momentum following a brief rebound in crude prices in October, and it remains to be seen whether the change will be enough for buyers to flock to that level.
Oil prices have been falling since reaching a high of regarding $120 in early June last year. To break the decline, we must see whether oil prices can break through the low of $90.
John Kolovos, chief technical strategist at Macro Risk Advisors, pointed out that although oil prices have risen, they must rise to a high above $80 for investors and end users to be likely to continue buying. However, Evercore strategists noted that oil prices have struggled to break above that level.
Oil stocks don’t look set to rise much either.
Oil ETFs hit a post-COVID-19 peak in late 2022, reaching a low of $90 per share, before plummeting. That’s no coincidence: After the 2008-2009 financial crisis, the ETF enjoyed a year-long rally before peaking around $100 in the summer of 2014.
Oil is highly cyclical. Oil prices rise and fall with the level of demand across the economy, and it may now be time for a down cycle. The Fed’s aggressive rate hikes have started to hurt the economy, and while it has lowered inflation, it might also be accompanied by more pain because rate hikes typically hit the economy with a lag.
In short, it’s probably not a good time to buy oil stocks or crude oil futures.
