Kristian Rouz – Since Donald Trump's election as US President in November, global oil prices have rallied, as did crude stockpiles and US extraction, reflected by the upbeat oil rig count dynamics. Oil prices keep climbing despite the mounting downward pressure. In fact, the recent buildup in inventories and rig count would've resulted in a crash in the value of oil.
Albeit this is unlikely to happen this time around due to the expectations of the further gains in oil consumption across the world's leading economies, energy investors find themselves in the crosshairs of contradictory market indicators, rendering energy stocks underperforming in the dearer oil environment.
Energy investors are lacking explicit optimism, as reflected by the stock market's dynamics, yet, most of them are maintaining their net-long positions in US oil futures and options, according to the US Commodity Futures Trading Commission data. This means that general market sentiment is that oil prices will keep rising: trade protectionism is gaining momentum in the US, and before long, American energy is poised to become quite expensive.
The lack of enthusiasm toward energy stocks might be explained by a simple fact that most US energy enterprises are reporting their quarterly earnings next week, and investors might be cautious ahead of data. Should the higher oil prices translate into substantially higher energy sector corporate revenues, energy stocks might catch up with the crude prices. Yet, the rebound in energy sector revenues might as well turn out to be a disappointment.
"Definitely we are going to need to see some proof in earnings to play catch-up here," Jeff Zipper of the Palm Beach, FL-based US Bank Private Client Reserve said. "Now we are going to see some clarity from when these companies report, at least in the sector, to see some follow through here."
The recent batch of data from the Energy Information Administration (EIA) rendered equity investors cautious: a report indicated a 14 mln bbl buildup in US crude inventories, sending US crude down to $51.22/bbl. Yet, the drop in price was brief, with oil rebounding back to $53/bbl after traders reassessed the absorption capabilities of the US refiners: despite the higher inventories, refineries in Louisiana and Texas could process greater amounts of crude than they are receiving presently, hence the push for the Dakota Access Pipeline (DAPL) and Keystone XL to be completed.
Hedge funds kept buying into oil for at least four consecutive weeks ending on 31 January, as evidenced by weekly Commitments of Traders (COT) reports. Meanwhile, US petrol stockpiles surprisingly depleted by 869,000 bbl due to higher domestic demand, pushing retail prices higher. All these factors have resulted in US drillers having added 114 oil rigs to their count of active extraction furnaces since November, also helped by the OPEC oil production cut. The overall amount of working oil and gas rigs in the US is now 741, some 200 derricks more than a year ago, according to Baker Hughes data.
Moreover, the Trump-proposed economic reforms in the US, gains in the post-Brexit UK manufacturing, and the recent stabilization in mainland China's growth are all factors supportive of a more expensive oil in the near-to-medium-term.