Hey There Income Hunters,
The consensus in the energy markets has definitely shifted in the past few weeks.
I think it started with the Biden administration talking about taxes and continued as US 10-year interest rates rose from 1.50% to 1.75% …
However, to me, it’s like the noise you hear when your favorite band is in between sets …
The fans are killing time with small talk, bottles are clinking, there’s the occasional “Woooo!”
That’s all that is going on right now in the markets …
The weak hands are fearing a turn and closing out longs, so the fear spreads …
All of a sudden, consensus shifts to a deteriorating outlook — when just weeks ago, headlines were about revised upward price targets.
What I see coming our way is the most powerful acceleration of growth and inflation that we have witnessed in our history …
I also see the volatility of Light Crude Oil Futures defining a market in consolidation mode as it waits for the push to higher highs over the next couple of months …
I thought this was an interesting soundbite on crude …
- “The swing lower was triggered by the deteriorating near-term demand outlook,” said TD Securities commodity lead Bart Melek. “With prices breaking below the 50-day moving average during the session, technical traders may well take WTI lower still.”
You can always find a reason after the fact. But understanding the power of pent-up demand can provide foresight.
- Nationally, more than $1 trillion in aggregate household savings above the pre-Covid levels
- A $700 billion drawdown from the Treasury account has to be completely injected into the economy by month’s end
- $120 billion per month in Fed purchases, with most of the money making its way into the markets
- $1.9 trillion in stimulus and aid making its way into the economy
- Possibly $3 trillion in infrastructure spending to add near- and long-term growth to the economy
Take a look at the crude futures chart with the options overlay and note the September to November correction in between stimulus bills …
Crude had rallied after storage constraints forced longs to get out and the price fell to -$40.
The market recovered to rally to the $40-$45 area, which had been established previously as a critical support and resistance zone.
But here is the key …
Each plunge was met with a higher spike in volatility. However, the vol spikes quickly reversed and prices continued higher …
In the current setup, the volatility of OVX, the volatility index for crude futures, came off hard on the plunge, similar to the episodes in Q4 2020.
Crude may continue to consolidate for a couple of more weeks, but once the stimulus money flows take hold, I look for it to be off to the races once again.
Bring it Home
It’s important to keep the macro picture foremost in your mind as we head into the second quarter. The U.S/ has a lot of company in the money printing game and the money will be spent.
I own the producers: Exxon (Ticker: XOM), Chevron (Ticker: CVX) and Shchlumberger Limited (Ticker: SLB). They are all trading at a discount to fair value and their valuations are tied to lower oil prices, so they have a nice cushion.
Keep the faith — this market has some legs left … and we will know when it’s time to sell.
Have a great day and as always …
Live and Trade With Passion My Friends,