Once called the «Black Gold» - did oil lose its shine?

1 October 2024

Oil price under pressure and close to 1-year lows
Economic uncertainties, investors sentiment weigh on the price
Energy stock sector follows this trend
Potential tilt to the upside:
- investors sentiment subdued
- supply level from OPEC+ will not be expanded
- positive economic surprise from China and US
- oil demand higher than anticipated
- Middle East conflict may broadly escalate
- Hurricane season
My Portfolio: tactical call on oil (short-term) and energy stocks (mid-term)

- Story published on 1st October - developed and comments added on 2nd October -

Financial markets started with a pick-up in volatility into the fall season.
This is nothing uncommon, as September is in average usually a negative month based on long-term historical data. Investors come back from their summer holidays and start to reshuffle their portfolio into the year-end phase. Knowing that September has its potential for being a negative month, a psychological effect kicks-in as well.

Is there any difference this time?
A change in investors mindset could be observed. As a consequence, bad economic data was no longer taken as good news. Before, the bad news signaled the potential of interest rate cuts by the central banks which was taken then as positive sign for risky assets.

At least this regime could be observed during the first half of September, till the first rate cut by the US central bank Federal Reserve (Fed). This rate cut kicked-in and led investors buy heavily US stocks again.

Oil price under pressure
This did not match the development of the oil price. However, there was a quick try of a recovery before the latest news that Saudi Arabia was said to give up USD 100 target for the oil price.

WTI Crude Oil Price (1 Year)
as of 30 September 2024

What are the factors currently weighing on the oil price?
The news from Saudi Arabia was interpreted that the major oil producer is going to increase its oil output in the near future. Even though, the OPEC+, the organization of the petroleum exporting countries, agreed to keep oil output unchanged, on a lower output level for the time being, just few days before.

Oil price is driven by supply and demand. Investors fear an overall sluggish economic environment, mainly in Europe and China, and still some fears left of a potential recession in the US. This could dampen the oil demand during the coming months. Which would then lead to an oversupply and further drop in the oil price.

These factors led investors to an overall negative stance towards the oil price and the overall energy sector. In addition, the technical picture does not look very supportive for the time being.

Sector ETF Global Energy Exploration and Production (1 Year)
as of 30 September 2024

Upside tilt for the oil price

Negative factors mentioned above got priced in, why the oil price came under pressure. However, with such a negative sentiment, the price move might currently go too far to the downside, especially also looking at the sector related stocks.

There are good reasons why this downtrend is coming to an end and some upside potential will arise.

Steady production by OPEC+
In contrast to broad market, I expect that the OPEC+ countries are going to keep the oil output unchanged. Any violation to the agreement by any of the members would have negative impact for everyone. The oil price would drop further. Nobody is interested in such a scenario.

Economic environment:
in the US:
US oil demand I expect to remain solid. For the time being, recession fears in the US are off the table. Beginning of this week, the Fed chairman, Jerome Powell, just indicated, that the interest rate cut cycle will be rather on the slower side. Thus, the US central bank sees the economy in a good shape, why there is no need of hectic rate cuts. Therefore, the probability of a so-called soft landing is quite high, even the latest early indicator did not show such a positive picture.

in Europe:
On the other hand, the European economic cycle probably remains sluggish based on the latest publication of early indicators. Therefore, oil demand from European countries is going to remain on a dampened level. The market priced this scenario with a lower demand on oil already in. Therefore, oil demand in Europa could rather have a tilt to the upside in case the economy sees some recovery.

in Asia:
China surprised markets with a stimulus package. Last week, China’s central bank, Peoples Bank of China (PBOC), unveiled its biggest stimulus package since the global pandemic. Stock market reacted immediately with a boost which seems to continue at this stage. However, the oil price did not react that moment. Should the stimulus work to push the economy for further growth, the demand on oil is definitely going to increase.

Investors Sentiment and Hedge Funds
Together with the technical picture, investors sentiment does not come up with a bullish stance towards the oil price. With potential positive news from the economy, the sentiment can quickly turn to the upside. How quick this can change we currently can observe on the move of Chinese equities after the announced stimulus package.
Latest data regarding the hedge fund shows that they are currently short positioned. Means they are forced to buy the oil later to cover their negative balance.
In case of an upside move in the oil price, they might quickly close their shorts again to avoid potential losses. The change in their big bets could provide further upside momentum then.
Hurricane season
An active hurricane season should mean higher oil prices. A hurricane can easily bring any damage to an oil platform located in the Gulf of Mexico. Effects can have an impact on short dated side as they typically do not have a large of lasting effect on markets. As last year, this year is mainly quiet.
Conflict in Middle East
Last but not least, the conflict in Middle East could become the most important factor to impact the oil price in the short-term. Further escalation may add an additional risk premium to the oil price as this could lead to certain disruption in oil production and therefore in oil supply.
Even it was already quite obvious that Israel will start to enter Lebanon with its ground forces the oil price did not show any significant reaction. Almost given as well, that Iran will come up with a certain counter attack.

Based on the factors mentioned and listed above, there could be a certain upside for the oil price, at least in the short-term. Especially, during Tuesday morning when the WTI Crude oil price first corrected towards USD 66 per barrel, market offered a good entry level.

My Portfolio
With the WTI crude oil price moving down towards USD 66, getting closer to its 1-year low, I decided to enter a long position in oil, as I do expect a certain rebound, the oil price moving to the upside in the short-term. As the selection of the right investment product is key in the commodity space, this investment call I can only recommend for well experienced investors.

However, the stock sector offers a similar opportunity. Most energy stocks related to the oil sector followed the downtrend of the oil price.
The sector offers a rather cheap valuation and the integrated players come up with an attractive dividend yield between 3 to 5%.
I already added some single names during recent weeks to my portfolio. To play this tactical investment call on a broader base, I, at the same time, decided to buy a sector ETF to be able to participate on the overall potential upside.

Disclosure of shares in my portfolio specifically mentioned in this article (as of 1 October 2024):
No particular disclosure as specific holdings/investment calls are mentioned in this article.

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