Energy Markets vs. Energy Companies

A couple of weeks ago we discussed the volatility contraction of the Crude Oil market, and how it could mean an outlier move ahead.  And close on the heels of that were two of the best in the financial blogosphere, Reformed Broker and All Star Charts, with posts recently on the energy “sector” possibly starting to outperform the general market after being a card carrying underperformer since the beginning of 2012.  Here’s the two charts showing the energy sector relative to the overall S&P (essentially dividing the price of the energy by the price of the overall stock market index).

New PictureNew Picture (1)(Disclaimer: Past performance is not necessarily indicative of future results)
Charts Courtesy: Reformed Broker & All Star Charts 

Now, you could be forgiven for thinking that the energy sector has been going down for most of the past 5 years from looking at the charts above – but those charts depict relative performance. The energy sector (via the ETF $XLE) has actually done quite well since the 2009 lows, see here:

New Picture (3)(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: Finviz

Those are two very different looking sets of charts, to be sure – with the relative performance trending down, and the absolute performance going steadily up (now we know why there’s billions traded around relative value strategies in the hedge fund world).  The different look in the first set reflects that the energy sector (i.e. energy companies) haven’t seen their stock prices rise as much as the overall market, not having anything to do with iPhones, electric cars, biotech, real estate, or streaming movies – until now, Brown and Parets point out.  Turns out there’s more than a few people taking notice of this trade – take a look at just how much money went into both the $XLE and $USO ETF’s just last week (April 18th-24th).

New Picture (2)Table Courtesy: Hard Asset Investors

And here’s where things get interesting – because the energy market itself, you know – the price of the stuff they pull out of the ground and from 2,000 feet below the bottom of the ocean, doesn’t look like either of those charts, with Crude failing to recapture its 2008 highs even while the $XLE has surged about 15% above its ’08 highs. Here’s what the price of Crude Oil has looked like since the ’09 lows.

New Picture (4)(Disclaimer: Past performance is not necessarily indicative of future results)
Data Courtesy: Quandl

We would expect a high correlation between energy prices and energy company stock prices, and while they both climbed off the 2009 lows in near lockstep – the price action of the last few years has been anything but correlated, with energy companies up about 30% since 2011 and Crude Oil basically flat over the same time period.  Which brings us back to the relative performance of the energy sector to the overall market… it’s been the range bound conditions in the energy markets since 2011 which have kept the lid on the energy sector (on a relative basis). A rising tide lifts all boats, and investors have been willing to buy up stock in energy companies along with the general market, despite Crude Oil lagging behind… but only to an extent.

So, from our seats – whether the breakout in relative performance of the energy sector continues depends in large part on whether Crude Oil can finally breakout of its multi-year consolidation pattern. A breakout to the upside could provide that extra bit of incentive which has been dragging on its relative performance for the past few years. And of course – remember that relative performance has a bit of a mortal flaw as well – if not using it as a pairs trade and actually going short one of the pairs.

If the general stock market is going down more than the energy sector is going down,  guess what; they are both going down, so it may be of little comfort for those owning $XLE to have a nice relative strength breakout in energy – resulting in them losing less than the general market.  We would rather be exposed to something which can actually make money when the market (be it stocks or energy) go down.

PS – if you think $USO is ever a good idea, compare its price action since 2006 to the charts above… There’s almost no relation due to the high roll yield cost the fund pays in the futures markets.

New Picture (5)(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: Finviz

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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

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