As we write, comments by officials in Saudi Arabia about possible OPEC production increases later this year have sent WTI crude oil futures down below $68.00/barrel (-4%), down from nearly $73/barrel just three days ago. Meanwhile, global energy stocks are lower by about -2% for the day and -5.5% for the week. We therefore thought it a prudent idea to post a quick review of energy fundamentals that, despite (or indeed because of) the selloff, point to this pullback as an interesting time to add exposure to the energy space.
First off, it’s useful to review were we’ve come from in the energy complex. Not that long ago, energy commodities and energy stocks were absolutely hated. Indeed, the energy sector is the worst performing developed market equity sector over the last four years, down 22%. The energy sector finished 2017 with its lowest weighting in the S&P 500 ever. But, over the last three months, energy is the best performing global sector, even after taking into account this week’s selloff. Momentum is turning for energy.
Next to inventories. US inventories this week registered a build of 5.8m barrels when the market was expecting a draw of 1.6m barrels. This helped push oil prices down this week, but the trend in inventories is clearly down. As the next chart below shows, inventories have been falling since the second half of 2016, and oil prices follow the trend in inventories closely.