Energy Stocks Sector Rotation

September 4, 2020 08:43 AM
As techs dropped, energy stocks tried to creep back
Biden's stance on fracking and fossil fuels
Goodbye summer blends
Energy Report

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The Phil Flynn Energy Report 

Can Oil Save The World? 

Can the oil market save the world? Well, maybe not, but perhaps it can save the global stock markets. The breakdown in the broken-down oil market on Wednesday was a precursor to the breakdown in global stock markets. Oil went first, and stocks followed, then oil tried to rebound, and oil as a leading indicator would suggest that stocks should bounce back. Yet the reality is that stocks needed to break after it a historic run led by tech stocks. The pre-holiday profit-taking was welcome and very much needed. Someone had to take a bite out of Apple, and Tesla had its worst week since March. As the techs dropped, energy stocks tried to creep back.  Exxon, Chevron, Occidental, ConocoPhillips, Shell, and BP may be a beneficiary if traders start to look for sector rotation or at least a hedge from the high flying FAANGS. 

Energy stocks will also benefit as President Trump’s polls are rising. Remember, Vice President Biden was going to ban fracking and eliminate fossil fuels. Of course, that was before he was for fracking and fossil fuels. Yet he’s kind of for or against it as he's kind of for and against the  green new deal. It’s complicated, okay. Let’s just say the Vice President Biden stand firmly for fracking or not.  

The U.S. dollar free fall seemed to end, and that started the oil price breakdown. The stumble and the rebound in the dollar helped break the oil price, but the dollar recovery may be short-lived. And while refiners go into maintenance, there are rising concerns that we'll see a tightening of gasoline supply and rising pump prices.

Part of the problem for gasoline is a glut of distillates. As reported by Reuters. U.S. refiners are stuck between meeting rising gasoline demand and the glut of supply in the lackluster diesel and jet fuel markets. Refiners cannot produce gasoline without making other products like diesel, commonly known as distillates. The coronavirus pandemic slashed demand by one-third worldwide, and so far, the gasoline use has rebounded faster than that of distillates. Refiners still have big stockpiles of diesel and other fuels and do not want to make more of those products due to poor margins.

Refiners have been running at around 80% utilization since the end of July, up from the spring, when the pandemic broke out, but still below usual levels. With summer driving season-ending, they are reluctant to boost output for the winter season, when gasoline demand declines.

Yet the risk is that gasoline demand may exceed expectations because we are coming from a lower bar. Gasoline demand should continue to rise despite the drop because of Hurricane Laura. If Congress gets together on another relief package, gasoline demand should spike. The odds are strong that we'll see gasoline inventories tighten significantly in the coming weeks. Less, of course, the break we get as we say goodbye to the summer blends.

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About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.