Despite encouraging signs late in 2019 that the energy market might be swept up in the rally that pushed major indexes to new highs, the prices for oil and natural gas have spent the initial weeks of 2020 in a downward spiral to new 52-week lows. And although OPEC has spent the better part of the past five years attempting to bolster prices, a persistent supply glut from U.S. oilfields and natural gas wells has so far stymied those efforts each time. And now, the outbreak of the COVID-19 fears have stoked fears of a global recession.
But while low energy prices have tightened the margins for major players in the sector, investors might have found a silver lining in inversely leveraged energy sector ETFs.
For starters, Direxion’s broad-based Daily Energy Bear 3X Shares (NYSE: ERY), which tracks the S&P Energy Select Sector Index (IXE), is higher in 2020 by more than 120%. Funny enough, ERY is the lowest-performing ETF of the three energy funds Direxion offers, the other two are up as much as 265% year-to-date, putting them well among the top-performing funds of the year so far.
But the question now is, will the bear market in energy persist in the near future or has the sector hit bottom? Additionally, are some industries facing a better or worse outlook than others?
Crude Oil And Petroleum
When most investors think of the energy sector, their minds immediately drift to the oil drillers and suppliers. Unfortunately for those companies, when investors think of them now, it’s usually in relation to the sub-$50 spot price for a barrel of WTI crude (for context, most analysts agree that $60 is the traditional floor of a healthy oil market).
The lower margins that result from such a low price have helped drive the Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares (NYSE: DRIP) up about 245% YTD. This is in part due to poor earnings showing form industry leaders like Schlumberger Limited (NYSE: SLB) and Exxon Mobil Corporation (NYSE: XOM), which both posted negative revenue and per-share earnings growth compared to the same quarter the prior year. Most of the companies in the industry also issued mixed guidance for 2020, influenced mainly by plans to drill the Permian basin.
However, the spate of oilfield bankruptcies that occurred over 2019 paints a bleak picture for the producers as long as oil remains at a discount. What’s more, short-term estimates from the U.S. Energy Information Administration projects the current pace of production and consumption will continue to depress oil prices through the first half of 2020.
But if the future currently looks grim for oil, it looks downright apocalyptic for natural gas companies. Liquefied natural gas spent the initial months of 2020 falling below $2 per million BTUs (British Thermal Units). This is thanks in no small part to rising LNG (liquified natural gas) production, inventories and even exports in the U.S. throughout 2019. That’s right, even as U.S. LNG exports rose to their highest level ever, a massive surge in production pushed inventories up by 20% from January 2019 and 2% higher than the average surplus over the past five years.
All of this helps to explain why the Direxion Daily Natural Gas Related Bear 3X Shares (NYSE: GASX) is already nearly twice the value it was heading into 2020 a little more than a month ago. Natural gas components like Devon Energy Corporation (NYSE: DVN) and Concho Resources Inc. (NYSE: CXO) are down 40% and 25% YTD, respectively, while others, like Apache Corporation (NYSE: APA) (the worst-performing stock of the 2010s) have managed to remain relatively flat on the year after it announced “a significant oil discovery” offshore near Suriname that garnered it a wave of analyst upgrades.
On the whole, few charts in the natural gas industry look promising from a long-term perspective and the EIA’s short-term outlook on a persistent supply glut doesn’t promise to change the outlook anytime soon.
There is obviously no way of ensuring whether the current geo-economic/political picture will remain consistent enough for these projections to bear fruit. However, based on the best information available at this moment, the energy sector still seems like it will remain bear bait for the immediate future.
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