A New Era For Oil & Gas

|
Includes: BNO, BOIL, DBO, DCNG, DGAZ, DNO, DTO, DWTI, GASX, GAZ, KOLD, OIL, OLEM, OLO, SCO, SZO, UCO, UGA, UGAZ, UNG, UNL, USL, USO, UWTI
by: Ron Rowland

Energy price movements amaze me. Starting in 1973, crude oil soared from under $20 a barrel to more than $115 by early 1980. Less than two years later, it dropped back below $100, a threshold it would not see again for 25 years. The ride down was not smooth, but it eventually bottomed out below $17 at the end of 1998.

From there, the cycle began again, zooming through $50, $60, $70, and $80 before taking a brief pause. From January 2007 through June of the following year, the price of crude oil went on a meteoric rise from $64 to $145 per barrel. It was in the midst of last decade's commodity boom, and experts were predicting even more gains ahead. The financial crisis brought about the collapse of many things, including crude oil, which abruptly fell back below $44. However, those bargain prices were short-lived, and prices ranging between $80 and $120 became the norm until the second half of 2014.

Many people, including myself, were convinced that crude-oil prices below $70 a barrel were a historical relic, something we could one day tell our grandkids about. Today, less than a year and a half later, many are beginning to ask the opposite question. Will we ever see crude-oil prices north of $70 again? The recent plunge has been nothing short of brutal, with prices dipping below $30 yesterday.

In contrast to the ups and downs of oil since 2008, natural-gas prices have been in a relatively consistent downtrend during that period. From more than $13 down to $1.80 last month. Once prices fall so far, any further movement seems astonishing in percentage terms. A few weeks ago, I discussed how leveraged ETFs exaggerate those moves even more.

There is a new ETF on the market called the Direxion Daily Natural Gas Related Bear 3x Shares (NYSEARCA:GASX). As its name implies, it tracks an index of stocks involved in the exploration and production of natural gas. Additionally, it moves 300% in the inverse (opposite) direction of those stocks each and every day. If the index falls 5%, then this fund will jump 15% higher. Over the past week, this ETF has gained 76.5%. That is not a misprint. Since its trading debut about six weeks ago on December 3, GASX has more than doubled in value with a 134.8% gain.

These leveraged instruments, tracking fast-moving and volatile indexes, are not for the faint of heart. They are only for the nimblest of traders with the ability to monitor their positions throughout the trading day. Although GASX has soared 134% recently, it had a one-day setback of 34.8%, losing more than a third of its value on December 23.

Some of the recent volatility and price declines for crude oil, natural gas, and the stocks involved with these commodities is due to sluggish demand. World economies are not growing robustly, and China is slowing down. However, even though weak demand has been a contributor, the major catalyst has been increasing supplies.

The U.S. now has abundant supplies of oil and gas. On December 31, an oil tanker left Corpus Christi, Texas, starting a voyage that will mark the country's first crude-oil export in 40 years. It is expected to arrive in Trieste, Italy, next week. A new energy era has begun, and the U.S. is disrupting the status quo of world oil supplies.

Sectors: The Utilities sector has been losing momentum and value this year, but it has done so at a much slower pace than its peers. As a result, Utilities climbed a rung higher to land at the top of the ladder, and it is the last remaining category in the green. Consumer Staples and Real Estate fell slightly into the red, with Consumer Staples moving from third to second and Real Estate slipping from first to third. Telecom and Health Care were in the green a week ago, but both have now relinquished those honors. Additionally, Health Care had an abysmal week and has moved deeply into the red. Last week, I discussed the defensive characteristics of these five top-ranked sectors. This week, it is obvious these characteristics are not applied equally, and being "defensive" does not mean it will move higher in times of market turmoil. Health Care's fall leaves it bunched with Consumer Discretionary, Technology, Industrials, and Financials. As bad as these categories are performing, there are two ranked even lower. Materials is re-testing its September low, which also happens to be its three-year low. The Energy sector wishes it was so lucky. With crude-oil prices briefly dipping below $30 a barrel, Energy has broken down to levels last seen in 2010.

Styles: Investors displayed little discrimination when it came selling their style-oriented holdings. All categories were equally punished and are in negative trends. The rankings still show a preference for larger capitalization stocks, but that preference does not translate to profitable action. Mega-Cap extended its reign at the top to 16 weeks, but its current momentum reading implies its intermediate-term trend is sloping downward at the rate of 21% per year. That is not good, but it is much better than the other end of the spectrum. At the bottom, Small-Cap Growth and Micro-Cap are now trending lower at the rate of 54% per year. In case you haven't noticed, the Micro-Cap category peaked in September 2014, moved into bear-market territory (-20%) last July, and is now down more than 37% from its high.

Global: Two weeks ago, I noted the anomaly of Pacific ex-Japan sitting at the top of the relative-strength rankings. That irregularity has now been resolved with Pacific ex-Japan's plunge from first to sixth thanks to Australia's stock market and currency both coming under pressure. Its fall resulted in five other categories moving higher despite encountering weakness the previous week. Japan is now at the top, and the U.S. is close on its heels. World Equity, EAFE, and the Eurozone also saw ranking improvements even though they fell deeper into the red. China's failed experiment with market circuit breakers, whether they were a cause or effect, coincided with its humbling start to 2016 trading. Canada remains wedged between the three developing market categories, and all are in steep negative trends. Latin America continues to fall and is now at its 2009 lows. If this support fails, it will be back to its 2005 level, which is not a comforting thought.

Disclosure: Author has no positions in any of the securities, companies, or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) is received from, or on behalf of, any of the companies or ETF sponsors mentioned.