Rare Sell Signal As Everyone Is Invested

Generally, oil stocks are correlated with the price of oil which makes perfect sense because oil producers sell the commodity. Plus, oil services companies raise prices when oil goes up and are forced to take concessions when they fall. That being said, owning oil stocks can be better than buying the commodity since you the benefit from capital returns. Furthermore, just because these firms produce and service commodities doesn’t mean individual ones don’t have certain competitive advantages. It is optimal to layer on company specific research with macro work. You can potentially make money on multiple fronts.

We are in an interesting position because oil prices have been strong due to the successful vaccination efforts in many leading economies, while oil stocks have been weak. It’s no longer just America that’s getting the job done. As of April 19th, 20.2% of Germans had at least one dose of a vaccine. Brazil seems to be plateauing at a high rate of cases and deaths. Currently 11.7% of the country has gotten 1 dose and 4.3% of the country has been fully vaccinated. We could be a few weeks away from the peak in COVID-19 cases and deaths in Brazil if the vaccines are effective.  

While oil prices have been solidly in the low $60s, oil stocks have been cratering. As you can see from the chart above, oil and gas stocks have had the largest negative divergence with the commodity in 15 years. That may be in part due to their extreme rally from early November to early March. Plus, they may have been hurt by the decline in yields. If oil prices stay above $60 or move higher, their stocks could recover. The OIH oil services ETF rose 150% from October 28th to March 10th. Since that top, the index is down 23%. The sector rotation towards reopening value stocks was halted. The 10 year yield fell from 1.75% to 1.56%.

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Disclaimer: The content in this article is for general informational and entertainment purposes only and should not be construed as financial advice. You agree that any decision you make will be ...

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