Energy Musings - July 1, 2024
The stock market posted another positive monthly performance led by Information Technology. Energy moved out of last place - gaining two spots. Higher oil prices helped Energy at month's end.
June Performance Like May But Energy Gaining Momentum
When we updated the Standard & Poor 500 Index sector performance chart for June data, we were surprised at how comparable the rankings were to May's. While the S&P 500 performance was comparable (+4.3% in May versus +3.6% in June), a few sectors shifted in the ranking.
The most significant move was Utilities going from #2 to #11. Energy moved from last place in May to #9 in June. Energy posted losses in both months. However, June’s loss (-1.3%) was half of May’s (-2.5%). It was helped by Energy posting a 2.68% gain during the final week of June.
Energy stocks gained during June as oil prices rallied enabling the sector to cut its loss in half compared to its May loss.
The month-end momentum for Energy was driven by strengthening oil prices. The WTI price rose 10% from the beginning of June to Friday’s final trading day. Commodity and hedge funds built long positions in oil in anticipation of growing demand and continued supply tightness as OPEC+ has announced plans to hold their production cuts for longer.
Our oil price chart shows how oil continues to trade within the $70 to $84 a barrel range. After testing the low end of the range, oil prices are at the higher end. That does not mean they will stay there or move higher. History has shown that they are just as likely to move lower. At some point, oil prices will break out of this range. Will it be higher or lower? Fundamentals suggest the breakout should be to the upside.
Oil prices improved during June giving the sector momentum heading into July.
June marked the end of trading for 2Q 2024. For the quarter, Energy finished #9, just as for June. Energy posted a 2.42% loss for the quarter, while the S&P 500 was up 4.28%. Surprisingly, because of better first-quarter performance, year-to-date Energy was in third place with a gain of 10.93%. However, that was still five percentage points below the gain of the S&P 500 Index.
Patience remains the watchword for Energy investors. Commodity cycles tend to be 5-8 years long, so there remains substantial time for Energy stocks to outperform the overall market and reward investors handsomely.
Dr. Stephen Leeb, chief investment strategist at The Complete Investor and Real World Investing, says that the fair value line for commodities is rising. He notes that the strength in energy and food prices reflects growing resource scarcities. Resource shortages are an existential crisis, says Leeb. That is because the shortages for these commodities “are deeply intertwined with shortages in virtually any commodity you can name.”
Commodities are in everything. The latest technologies require basic materials – natural resources, i.e., commodities. Inflation in commodity prices will filter all through the supply chain, helping to keep all prices up – not just for specific commodities. This commodity cycle may last longer than people expect.