There’s nothing like mayhem in the Middle East to get energy stocks and oil prices moving, but be forewarned that geopolitically driven investment gains can reverse faster than the market can scream “sell.”
The crisis in Iraq has minted a number of winners in the equities and futures markets after years of sleepy action. Energy stocks in the S&P 500 are up 13% on a total return basis so far this year. That beats the broader market by 6 percentage points.
That sector-wide rally has been a boon for exchange-traded funds tracking energy stocks. The Energy SPDR (XLE) is up more than 13% on a price basis for the year-to-date, and more than 14% when adding in its dividends.
Meanwhile, punters in the commodities pits are also enjoying gains after a prolonged period of somnambulance. Global benchmark Brent crude oil prices touched nine-month highs of $115 a barrel this week. And at around $107 a barrel, U.S. benchmark oil prices haven’t been this high since September of last year.
Oil Price: Respect the Trading Range
As happy as investors in energy stocks and oil might be, they shouldn’t get too comfortable — or greedy. We’ve seen this sort of geopolitical panic drive up oil prices a number of times recently, but the boring old trading range has remained very much intact.
After all, for all the breathless headlines and market action, futures pegged to crude oil prices are still up only about 8% for the year-to-date and 10% over the last 52 weeks.
As for energy stocks, the XLE lagged the broader market until two months ago. Indeed, before the recent jump, XLE trailed the benchmark equity index over the year. Look at the last three- and five-year periods and you’ll see XLE has been absolutely clobbered by the S&P 500.
Any gains just don’t seem to stick.
Through the Arab Spring — including revolutions and civil wars that are still wracking the region – oil prices have been stuck in a fairly narrow corridor. Since 2011, U.S. benchmark oil prices have traded in a range of $80 to about $112. Global oil prices have been rangebound from around $90 to $125.
There’s little reason to think the latest Middle East crisis will finally provide any kind of breakout.
After all, sluggish global growth is still tamping down demand, weighing against higher prices. U.S. production is at a multidecade high. And Saudi Arabia has ample room to ramp up production if soaring oil prices threaten to strangle what demand there is.
With regard to Iraq, what’s most important is that the Sunni militia forces haven’t disrupted the production or export of a single barrel of oil — because they can’t. The fighting is in the north, but the entirety of Iraq’s oil production and export facilities are in the south, far away from the violence.
The headlines might favor higher levels for energy stocks and oil prices for a little while longer, but the macroeconomic fundamentals and facts on the ground do not.
Don’t be surprised if the outsized gains in oil prices and energy stocks fizzle out.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.