Energy Sector Is Approaching Negative Seasonality

Last summer, in June 2007, to be precise, I wrote that the caution was warranted for the energy sector. Let’s take a look to see how I did and what lies ahead for this area of the market.

The energy sector managed to push a little bit higher in July 2007 but it then succumbed to the general market weakness. So since I wrote about my apprehension, it didn’t go anywhere really for the next two months:

The strength of this sector was undeniable in 2007. In fact, last year it bucked negative seasonality to deliver one of the best sector returns. Usually, from the beginning of June to the beginning of December, energy stumbles. In fact, in the past decade only 3 years have bucked this negative seasonality. On the other hand, once December rolls around, things do tend to rock and roll.

Seasonality

The logic behind the seasonal influence seasonal weakness in the commodities themselves. Natural gas and oil are weakest in the summer (May to July) and strongest in winter. So right now we are just about to enter the worst time of the year to be long oil and gas stocks.

On top of that, 82% of stocks in the Energy Select SPDR (XLE) are trading above their 100 day moving average. That’s not the maximum but it is high. As well, the bullish percent for the sector is a bit “toppy,” hovering below 80%:

The smart thing to do was buy in January and March 2008 when the bullish percent spiked down to 20% (and less). But you already knew that because you know how to time the market using bullish percent charts, don’t you?

On Wall Street it depends who you listen to. Goldman Sachs is hyper-bullish on oil awaiting $150-200 a barrel oil while Lehman Bros. thinks that prices will fall to $83 a barrel in 2009 and $70 by 2010.

What about Peak Oil?

I don’t buy into “Peak Oil.” We will either discover more oil, better extraction methods for existing reserves or move to alternative energy sources. Take new discoveries for example: Thanks to the Tupi discovery, Brazil will become a major oil player - probably joining OPEC as a result. But that is years in the future, assuming all goes according to plan. Petrobras (PBR) will have to drill more than 16,000 feet under the seabed, itself under 10,000 feet of water. The reward though is tantalizing: 5-8 billion barrels of oil and natural gas.

Comments

[oildriller]

Another guy who has just finished breast feeding talks about oil!

[richjoy]

I think Babak has something to say...and I appreciate new info, so I will add it to the mix.

[galewhitaker]

Dear Babak
If you read the peak oil mantra carefully you will learn that when demand exceeds supply the price of oil will skyrocket. Skyrocketing oil prices will usher in the "end of times". Do you think that when they go after the Tupi oil its going to produce cheap oil from 30K feet under the sea. Not likely. Do you realize that no segnificant amount of new oil has come on line in four years. Does oil at $126/barrel sound like skyrocketing prices? It does to me. The refineries are currently processing oil that cost them $89. What do you think is going to happen to our economy when they start passing on the cost of oil at $127 (it passed $127 while I'm typing this comment). Maybe god is creating more oil down there under the ground. I sure hope so.

[John Egan]

His article is a "tech" view of energy.. People need to read these articles and view it in light of the approach... Who knows... You might even learn something...

I'll kick myself an alert and review his interpretation as time goes on.. What's the harm...

Thx jegan ;-)

[givargi]

Mr. Babak, I wander what "alternative"... technologies will substitute oil? Prius? "Hydrogen?" Solar Car? iPhone on wheels? And what new technologies will pump out oil at $60 a barrel, tractor beams? Yappies are hillarious.

[Gary W]

You're ignoring the 800-pound gorilla in the room: political instability in the middle east. As long as a McCain Presidency looks possible, oil will trend higher. Investors know Bush is like a kid with firecrackers.

[Gary W]

Givargi, no, actually your ignorance is hilarious. Where did oil come from? From the Sun. If that's a mystery to you, go stick your nose back in propaganda. If not, why not get energy directly from the Sun, where you need it? If you know why, do share.

[Gary W]

Gale Whitaker, you're ignoring the speculators who drive the spot crude prices on pure psychology. The economic price is still under $100.

[jimmy46]

@gale
Does oil at $126/barrel sound like skyrocketing prices? It does to me. The refineries are currently processing oil that cost them $89."

refineries pay much less than benchmark because much oil
is either heavy or sour.
Frontier <FTO> is paying $60 for canadian crude now
because it's both heavy & sour.

Benchmark is for light sweet crude, the best.

[givargi]

To Gary W.: " Where did oil come from? From the Sun. .... why not get energy directly from the Sun, where you need it? If you know why, do share."
hehe, let's clear one thing up first (smug face) I have a PhD in biology...
now, oil came from plant material that grew and decayed over the course of millions of years (sun), and underwent extreme pressures and heat over the course of some more hundreds of millenia (totally unrelated to the sun). Thus the amount of plant matter and energy, i.e. "sun" that took to make oil is immense. Solar will not provide enough energy to substitute oil (or coal) for our current lifestyle. If we drastically reduce energy expenditures, then yes, we will wean ourselves from oil, and USE NO CARS, but Americans have been brainwashed into lazy, fat, smug "consumers" and feel self-entitlement to good life without actually understanding why we have it. Thus, oil will keep rising next year, and we have to get used to that now and our lifestyle will have to be cut back severely either by our own will, or against our will in which case we will suffer immensely.

[common sense]

Ok....I don't know much about oil,or economics,but I do have a bit of common sense.If oil keeps rising,which it might or might not....then I think that we will see more super technology's emerging.Does anyone read popular sciene? They don't make that stuff up,well most is not made up. Make sure all the doomsday profits learn the words- Nessity is the MOTHER of all Invention-.We will see very low gas/oil/crude prices but they may not show up for a few years.As our world grows people will always be inventing,were already producing cars with incredible gas mileage,that technology will trickle down to the homes and we will get 30 days from 10 gallons of oil to heat our homes.Maybe people will use different ways but we have to look ahead,not at the now of high prices and useless wars of greedy politicians but of the high tech gadgets and new era of energy.

[AviGandhi]

Amen Mr. Whitaker.

Givargi, despite your credentials, your ignorance astounds me. The amount of energy you claim is put into oil is not actually part of the energy one gains by burning it - in fact, your argument proves that oil, like corn-based ethanol, took far more energy in than it gives out. The energy that is expended when we burn oil is ONLY the energy that was in those plants and animals that died and decayed; the energy of the sun is NOT what's in oil, it was just used to MAKE the oil, just like natural gas is used to MAKE ethanol.

That said, SunPower just yesterday achieved an energy efficiency of 23.4%; First Solar produces panels at a cost parity with modern coal plants ($1.10 per watt, or $1100 per kilowatt installed) and EMCORE's concentrated photovoltaics can produce at efficiencies as high as 37% (albeit only with direct sunlight). The solar industry is growing, my friend, and oil production is declining. You can argue sentiment, but you can't argue with these companies' own numbers. Solar is already nearly as efficient as oil/natural gas/coal (more so, in EMCORE's case). Now it's just a matter of getting people who are afraid of change up onto their walkers so they can go with the flow.

Oh, and the Rockefeller heirs would beg to differ about oil's long-term viability - just check out their press release regarding their demand for Exxon Mobil to separate the roles of CEO and Chairman.

[paultaut]

When it rains, it pours...There is absolutely nothing that will prevent WTI from rising to at least $200 before 2010.

That grade has peaked.

There is absolutely nothing that can be done in the next 19 months to bring new supply on the market or replace current infrastructure.

Be grateful if $200 is not reached this year.
The end of the "slow" season is almost here and Hurricane Season is almost upon us.

[pockyclips2020]

In the grand scheme of things, all forms of energy derive from the sun. Even geothermal and nuclear, from 6000 or 4.5 billion years ago.

[Get real!]

Babak wrote, "I don’t buy into 'Peak Oil.' We will either discover more oil, better extraction methods for existing reserves or move to alternative energy sources."

FYI, Babak, we would have had to "discover more oil" twenty years ago in order to start bringing it to market today. But that's not going to happen, because FYI, annual oil discoveries have been declinining each year for over 30 years! Of the three largest oilfields in the world, two are in steep decline (including Cantarell in Mexico), and the world's largest, Gawar in Saudi Arabia, is in its old age, after over 50 years of extraction, and is now producing more water than oil. Just to make up for the declines in production in Cantarell, the North Sea, and other mature fields, we need to discover new oilfields totalling the size of Saudi Arabia EVERY YEAR!

As for new extraction methods helping -- the U.S. uses the world's best, most technologically advanced extraction technology, but yet our oil production peaked in 1970 and has been declining ever since, despite Alaskan oil and deep sea oil brought online since then. Likewise, the British use the latest technology in their North Sea oilfields, but North Sea oil production is declining rapidly.

This analogy may help: think of an oilfield like a 16 ounce slurpee (drink). Better extraction technology is simply a "super straw" that sucks up the liquid FASTER, but it does NOT increase the amount you can drink, does NOT turn your 16 ounce slurpee into a 32 ounce slurpee! Or you could say better drilling technology is like giving an extra straw to your friend to share your slurpee drink -- two straws will sucks up the liquid twice as fast, but doesn't change your 16 ounce drink to a 32 ounce drink!

Economists are eternal optimists, however.