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Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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Bulls Call The Bottom In The Oil Market, But Are They Right?

The current year is likely to go down in the annals of stock trading as one that set the biggest records, both good and bad. It took a mere 20 days for the Dow Jones to descend into bear territory, making it the fastest slide in the history of the U.S. market thanks to the ravages of the worst pandemic in modern history. 

That's lightning-fast, considering that bear drawdowns over the past century have averaged ~156 days. 

Yet, the stock market has staged an almost equally sharp countertrend rally, managing to retrace nearly half of its losses in just 15 days.

Mega-cap growth ETFs such as the iShares S&P 500 Growth ETFVanguard Megacap Growth ETFInvesco S&P 500 Top 50 ETF, and iShares S&P 100 ETF have been seeing the biggest inflows, with a heavy weighting toward technology and tech heavyweights such as Apple Inc. (NASDAQ:AAPL), Amazon Inc.(NASDAQ:AMZN), Microsoft Corp. (NASDAQ:MSFT), Alphabet Inc. (NASDAQ:GOOG) and Facebook Inc. (NASDAQ:FB). Tech-heavy indexes such as the Nasdaq Composite (COMP) and the Invesco QQQ Trust (QQQ) have already turned positive for the year.

The curious thing is that investors are also betting heavily on two of the hardest-hit sectors: Energy and airlines.

S&P 500

Source: CNN Money

The energy sector's most popular benchmark, the Energy Select Sector Fund (XLE), has gained nearly 60% from its March 23 nadir, a level it last touched in December 2003, with the fund's shares outstanding climbing 45% in April alone. Meanwhile, the airline sector's proxy, U.S. Global Jets ETF(JETS)--a fund consisting mostly of American airline stocks--has seen its outstanding shares climb from 1.5 million at the end of March to more than 40 million shares currently.

XLE

Source: XLE

You can hardly fault the bulls, though, with crude oil on track to finish the best week in history. WTI Crude oil futures for June delivery (CL1:COM) have rallied 31% since Monday's to $24.04/barrel at 9am ET Friday, the biggest one-week gain by the contract since its inception in 1983.

The meteoric rise can be pinned on four factors:

- Early signs of an oil demand recovery, particularly in the U.S.

- OPEC+ ~9.7M barrels production cuts coming online in May

- Rapid independent curtailment by U.S. producers to the tune of ~1M barrels

- Saudi Arabia raising its official oil selling prices after lowering them two months ago after fisticuffs with the U.S. over market share

The Bears Disagree

But maybe the oil bulls need to pump their brakes.

Not everybody is buying the bullish narrative, with that much is evident from the market's biggest safe haven commodity--gold.

The gold market has continued its epic rise despite drastically lower demand in the key markets of China and India. Shares in the largest gold ETF, SPDR Gold Shares (GLD) have climbed 12.8% in the year-to-date, their highest since 2013 with the fund now boasting total assets worth a staggering $57.8B. It's smaller brethren, the iShares Gold Trust (IAU) have rallied 13.2% YTD, making gold one of the very few commodities in the green this year.

Powerful stock market rallies are seldom accompanied by similar moves in the gold market. It appears that gold punters are counting on simmering tensions between the U.S. and China over the former's criticism and accusations of the latter's handling of the ongoing pandemic to escalate into something worse--maybe as bad as the Cold War.

Although the worst in the oil market seems to be in the rearview mirror, the market is hardly out of the woods.

The International Energy Agency(IEA) has forecast that global energy demand for the entire year will be 6% lower than pre-crisis levels, or 7x bigger than during the 2008 financial crisis as well as the biggest in absolute terms in history. We simply have never been here before.

"It is still too early to determine the longer-term impacts, but the energy industry that emerges from this crisis will be significantly different from the one that came before," IEA Executive Director Fatih Birol has opined.

With some oil executives even predicting that oil demand may never fully recover, it's more prudent to err on the side of caution.

By Alex Kimani for Oilprice.com

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  • Mamdouh Salameh on May 11 2020 said:
    After its catastrophic ordeal, oil prices have no alternative to go but upward underpinned by the gradual easing of the global lockdown, the implementation of OPEC+-led production cuts and China’s bouncing back with its crude oil imports for the first four months of 2020 averaging 10.11 million barrels a day (mbd) and slightly higher than the same period of 2019 and its overall exports rising by 3.5% despite projections of a 15.7%. This strongly suggests that a recovery is underway, and it may accelerate in the coming months.

    Still, there will be radical changes in the competing interests of major players in the global oil market in the aftermath of the coronavirus outbreak.

    OPEC+ will emerge much stronger with a real acknowledgement by the world of the pivotal role it plays in ensuring the stability of the global oil market and prices grudgingly accepted even by the United States.

    Russia and Saudi Arabia in their capacities as the world’s largest crude oil producer and the world’s largest crude oil exporter respectively will continue to compete for market share. Still, they will cooperate where they see mutual benefits. Both share one major objective, namely the elimination of US shale oil industry from the market.

    The United States crude oil imports will resume their upward rise with the inevitable decline in shale oil production probably hitting 10-11 mbd in the next two years.

    China will continue to be the uncontested driver of both the global economy and the global oil market well into the future.

    The global oil industry has no alternative but to cut dividends drastically if it is to survive rather than sink under the weight of its outstanding debts with Royal Dutch Shell leading the way forward by cutting its dividends for the first time since 1945.

    The US shale oil industry will emerge leaner with far less influence in the global oil market but will always be needing a life support machine provided American tax payers.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Geo Lennon on May 11 2020 said:
    "Shares in the largest gold ETF, SPDR Gold Shares (GLD).."

    Alex Kimani, you seem to have a bit of familiarity with this particular gold fund. I've spent quite a bit of time doing my due diligence into GLD. Would you happen to know why there is a clause in the GLD prospectus that states GLD has no right to audit subcustodial gold holdings? The GLD managing organizations sure went out of their way to create this glaring audit loophole. What is the purpose of this loophole? Additionally, the GLD organizations promise that this fund is 100% backed by actual physical gold but yet they staunchly deny retail investors the right to any of their listed physical gold. I've also discovered a number of other issues along the way:

    "CNBC's Bob Pisani also made a highly publicized visit to GLD's gold vault in a segment called Gold Rush: The Mother Lode. GLD's administration organized this visit to show that GLD's gold actually exists. However, the gold bar held up by Mr. Pisani showed a serial number of ZJ6752 which did not show up on the latest bar list during that time. It was later found that this "GLD" bar actually belonged to ETF Securities."

    "Did anyone try calling the GLD hotline at (866) 320 4053 in search of numerical details on GLD's insurance? The prospectus vaguely states "The Custodian maintains insurance with regard to its business on such terms and conditions as it considers appropriate which does not cover the full amount of gold held in custody." When I asked about how much of the gold was insured, the representative proceeded to act as if he didn't know and said they were just the "marketing agent" for GLD. What kind of marketing agent would not know such basic information about a product they are marketing? It seems like they are deliberately hiding information from investors."

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