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Crude weakness fails to dent oil & gas stocks, with bulls remaining unmoved


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Crude declines make little difference for FTSE oil & gas producers, with the long-term view remaining bullish for energy

bg_oil_pump_366223737.jpgSource: Bloomberg
 

 Joshua Mahony | Senior Market Analyst, London | Publication date: Monday 30 January 2023 

Crude declines see Brent lose 34%

Crude oil has suffered substantial losses over the course of the past year, with brent currently trading 34% below the March 2022 peak of $131.51. This decline represents grounds for optimism on the inflation-front, with headline CPI sliding lower across Europe and the US. However, traders continue to wonder whether this move will represent the top for the market or simply a temporary pullback within a long-term uptrend. Key considerations for the bulls include the re-emergence of Chinese economic activity as Covid restrictions are withdrawn, set against the risk of declining demand as recessionary pressures take hold. Looking at the monthly Brent crude chart below, we can see that this current month looks to be closing out in a doji candle, marking a second consecutive month of indecision. Meanwhile, the stochastic oscillator appears to be tightening, signalling the potential for a bullish shift in momentum before too long. With price currently trading around the 76.4% Fibonacci support level, the bulls will hope that the long-term uptrend will soon kick back into play.

LCO-Monthly-2023_01_30-13h18.pngSource: ProRealTime

SPR back down to multi-decade lows

Another aspect to consider comes from the US, who have been drawing down their strategic petroleum reserve in a bid to support prices as OPEC restrict output. That decline in reserves can only last so long, with current levels back down to the lowest point since 1983. Recent comments have signalled that the US could move to instead seek to top-up their reserves around the $70 mark. Could a shift from supplier to consumer help tip sentiment back in favour of the bulls?

SPRLEVELS30123.png

FTSE oil & gas producers outperform

One interesting area of outperformance has been the relative strength of oil producing stocks despite this decline in crude prices. Thus far, we have largely seen producers continue their ascent, with the volatility in oil and gas prices doing little to stifle sentiment. However, the chart below highlights how the FTSE 350 oil & gas producers sector essentially provides a more stable play on energy prices, with the stocks largely reflecting the underlying trend without necessarily seeing the same major swings that can occur for crude. The pullback we have seen in Brent (blue line) thus brings the total gains over the past two-years down to the area seen for FTSE 350 producers. For now, the uptrend remains in play for the sector, thus highlighting the belief that this recent pullback in energy prices serves to reflect a reversion back into the mean uptrend. With that in mind, the weakness seen in energy prices, and consolidation in FTSE oil & gas stocks, is deemed a potential precursor to another move higher to continue the long-term uptrend.

OIL-Weekly-2023_01_30-13h05.pngSource: ProRealTime
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