Energy Could Be Stabilizing as Focus Shifts to European Natural Gas Crunch

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Energy stocks fell sharply in June as investors took profits on 2022’s best-performing sector. Now they could be stabilizing as inventories tighten and Europe faces potential shortages.

The S&P Energy Select Sector Index ($SIXE.X) rose above its 21-day exponential moving average yesterday for the first time in five weeks. That’s a potential indication of the intermediate trend growing more favorable.

The bounce came after U.S. crude-oil inventories dropped by 446,000 barrels. (Analysts polled by Reuters had expected a 1.4 million increase.) Domestic stockpiles, including the Strategic Petroleum Reserve (SPR), are near their lowest levels in 15 years.

Meanwhile, Russian natural-gas flows to Europe are dwindling. While immediate cause was maintenance to the Nord Stream 1 pipeline, there are concerns Moscow will restrict supplies because of sanctions and the war in Ukraine. That creates the risk of major shortages — just as Europe needs to amass supplies for winter.

Crude oil futures (@CL) with relative strength vs. natural gas futures (@NG).

“The oil and gas market fundamentals still strongly support a multiyear energy upcycle,” Halliburton (HAL) CEO Jeff Miller told investors after the company reported better-than-expected quarterly results. “Meaningful supply solutions will take time, OPEC spare capacity is at historical lows, the strategic petroleum reserve release is unsustainable, and the risk to Russia supply remains high.”

Natural Gas vs Crude Oil

While most investors probably know energy prices are up, they may not realize some of the unusual things happening within the market.

One major trend is the demand for natural gas. The chart below shows crude oil futures (@CL) with a relative strength indicator benchmarked to natural gas futures (@NG). It shows that black gold has lagged gas by 41 percentage points in the last two weeks. That is one of the biggest differences since the data begins in 2001.

The second is potentially weaker demand from U.S. drivers. The same government report showing the drop in U.S. crude inventories also revealed gasoline stockpiles 3 million barrels ahead of estimates. Another report by CNBC noted that gasoline demand has dropped 5-6 percent from the same weeks last year. It cited both higher prices and the work-from-home movement.

In other words, demand is growing for natural gas even as gasoline usage slips.

S&P Energy Select Sector Index ($SIXE.X), daily chart, with 21-day exponential moving average and 200-day simple MA.

Energy Stocks

This new dynamic is already playing out in energy stocks. TradeStation data shows gas-associated pipeline stocks like Oneok (OKE) and Williams (WMB) outperforming in the last month. Cheniere Energy (LNG), which transports natural gas to Europe, has also bounced more quickly than the broader sector. The same is true of production companies associated with gas, like Range Resources (RRC), Chesapeake Energy (CHK) and Coterra Energy (CTRA).

On the other hand, companies most associated with crude-oil production and gasoline have lagged. That includes companies like HAL, ConocoPhillips (COP) and Valero Energy (VLO).

The table below includes nine energy companies that have rebounded most quickly following the sector’s sharp pullback.

CompanyBusiness1-month changeMarket Cap
Range Resources (RRC)Natural-gas production+15%$8 billion
EQT (EQT)Natural-gas production+15%$14 billion
Chesapeake Energy (CHK)Natural-gas production+14%$11 billion
Occidental Petroleum (OXY)Oil & gas production+14%$59 billion
Oneok (OKE)Pipelines+9.4%$26 billion
Williams (WMB)Pipelines+9.3%$39 billion
Coterra Energy (CTRA)Natural-gas production+8.9%$23 billion
Kinder Morgan (KMI)Pipelines+7.9%$39 billion
Cheniere Energy (LNG)Natural-gas tankers+7.8%$34 billion
Source: TradeStation Data

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