Following the Money in Energy, Part 3


Last week we explored strong price action in the energy sector and the up-and-coming subset of liquid natural gas. Today we’ll survey broader conditions in the space because something of a perfect storm may be developing for the bulls.

Simply put, demand is rising and supply is flat or falling. A quick compilation is below.

Supply: Energy Department data shows a steady decline in U.S. oil inventories since last February. All of a sudden we’re back to levels from April 2015!1

Demand: Tanker intelligence firm ClipperData says China reported record amounts of oil in November.2

Supply: OPEC is keeping a lid on production — unlike in previous years. Cartel leader Saudi Arabia is especially motivated to boost crude prices because it’s selling shares in the state oil company.

Demand: Measures of the global economy are the healthiest in at least a decade. That’s seldom bad news for a cyclical commodity like oil.

Supply: Industry consultant Rystad Energy says 2017 saw the least discoveries of new crude deposits since at least the 1940s.3

Demand: China’s natural-gas consumption rose 19 percent through the end of November.4 And, guess who’s stepping in to meet that appetite? U.S. shale, that’s who…5

Supply: Consultancy Wood Mckenzie says heavyweights like Exxon Mobil (XOM) are cutting exploration and production budgets despite rising prices.6

Demand: Hedge-fund traders, perhaps the most important buyers, are placing long bets in the futures market.7

In summary, traders may have forgotten about energy following a three-year bear market, but all of a sudden some bullish stars seem to be lining up for the sector.

1. U.S. Energy Information Administration: Weekly U.S. Ending Stocks of Crude Oil and Petroleum Products.

2. Oil-hungry China imported record levels of US crude in November. 12/8/17.

3. Business Insider: Oil discoveries are at an all-time low — and the clock is ticking. 12/23/17.

4. Xinhua: Natural gas consumption surges in China. 12/18/17.

5. Bloomberg: U.S. Gas Sales to China Boom as Buyers Seek to Avoid Pinch. 12/26/17.

6. Reuters: Quest for new oil discoveries still on back burner. 1/4/18.

7. Bloomberg: Hedge Funds Eye Oil’s Year-End ‘High Note’ After Bumpy 2017. 12/15/17.

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David Russell is VP of Market Intelligence at TradeStation Group. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.