The Energy Bull Market Investors Shouldn’t Forget About
Crude is getting hammered.
It’s fallen to its lowest level since November 2016, which was before OPEC announced the production cuts that sent global oil prices on a bull run.
But before you panic and throw up your arms in frustration, remember one of my investing tenets: “There’s always a bull market somewhere.”
And with crude prices falling as markets around the world continue to grapple with the glut, it’s good to revisit a bull market that’s been growing for a decade… and continues to pick up speed.
In fact, this market is flipping the world on its head. It underscores one of the great strengths of U.S. businesses: adaptation.
There are few visuals that better demonstrate just how much the U.S. economy has changed over the past decade than this chart of U.S. net imports of petroleum products…
Imports have declined more than 200% since their peak in 2006!
You might be asking, “How is that possible?”
Well, starting in mid-2011, the U.S. became a net exporter of petroleum products. And since January 2005, U.S. exports of finished petroleum products have soared 288% higher.
On top of that, U.S. exports of just crude are up 2,463% since 2010. In the past year, since the ban on crude exports has been lifted, they’ve more than doubled.
That’s how dramatic the energy sector of the U.S. economy has changed over the last 10 years. It shows how swift our movement from net importer to net exporter has been over the past five years.
It’s just another example of how the world is having to adapt to the new U.S.
The U.S. has traditionally been the world’s great consumer. We gobble up every raw material in massive quantities. But in the wake of the U.S. shale revolution, we’ve quickly emerged as one of the great suppliers for crude and petroleum products, not to mention natural gas and liquefied natural gas.
Because of this, the global oil glut is back in the headlines. Every time OPEC tries to take control and reduce supply, the U.S. steps into the void.
That means we must remember our strategies for the ebbs and flows of crude markets. We can’t panic. We just shift to where the bull market is underway.
Now, petroleum products are refined.
At the end of May, U.S. refineries set a record for gross inputs of 17.7 million barrels per day (bpd).
Since 1990, U.S. refinery inputs have topped 17 million bpd two dozen times… Every single one has taken place since July 2015. But refinery utilization rates haven’t topped 95%. And that’s due to the fact that U.S. capacity has increased by 659,000 bpd since August 2015.
So we’re seeing U.S. refineries running at a record pace.
And they’ve been doing this in an environment where crude prices have faced downward pressure for much of the past two years.
As I’m writing this, the price of crude has fallen 17.5% in 2017.
In a low-price crude environment, refineries rally. That’s their bull market because the input they need – crude – is cheaper. We can see this in how refinery shares are doing…
Year to date, the VanEck Vectors Oil Refiners ETF (NYSE: CRAK) is enjoying a completely different ride than is either the Energy Select Sector SPDR ETF (NYSE: XLE) or the SPDR S&P Oil and Gas Exploration and Production ETF (NYSE: XOP).
The Oil Refiners ETF is up 11% in 2017. The Energy Select fund is down more than 14%, and the Oil and Gas Exploration and Production fund is down nearly 26%. Over the past 12 months, despite the ups and downs of crude, the Oil Refiners ETF is up nearly 30%.
Investors must remember, there’s always a bull market somewhere. Exploration and production companies boom as crude prices soar higher. When crude prices roll over and head lower, refiners take charge.
There’s no need to panic… only a need to shift focus.