It’s time for a topic change. No there is not resolution to the Greek drama yet, nor have there been any really change in information. Deals are rumored to be close, then disappointment. Perhaps Saturday will surprise us, but it is a wait and see situation.
Meanwhile, we should look at a disconnect going on between related assets – this time in energy. After the fall of both oil spot price and energy equities in 2014, the two assets have been trading with a high correlation for most of the first part of 2015. As went the sentiment (and price) of oil, so went energy equities. That relationship broke apart, however, after the recent increase to $60 per barrel on West Texas Intermediate (WTI). Energy equities rallied along with the commodity price as we came through the seasonally soft demand in spring as refineries are in a maintenance period and concerns over filling storage subsided. After April, the commodity price went into a “consolidation” period where it remained relatively range bound after the 50% increase off the low. Meanwhile, energy equities retraced most of their gains. What is to be said of this divergence? The broader US equity market (S&P 500) has not fallen. Instead, it has remained range bound over this same period since April 30th. Perhaps, energy equity investors are asserting their opinion that the bounce off the bottom in March is a false signal and will prove short-lived. Sure, global demand for oil has come in stronger than expected (around 1.3mm barrels YoY) but there is still the supply response that is possible in the US at a $60 price and the global overhang from Iran and Libya eventually returning. Or perhaps, it is not even fundamental. Perhaps it is just that the fast money played a trend and sold out once commodity prices flat lined and the value buyers were not ready to step in yet. While we remain bullish on the outlook for energy in the long-term, we see a potential slog in the quarters ahead. Q2 earnings are likely to be messy (another reason equities might be off). An improvement in sentiment may require the global imbalance of supply and demand to be trending towards tightness which points towards 2016. Staying lower for longer ($60-75) while volumes gradually grow in the US as prices grind up (keeping a lid on how high and how fast) is our base case.