Hello, Subscribers:
In recent Haymaker editions, I’ve admitted that several of my bullish calls on commodities haven’t worked well. Exceptions were gold and silver for most of 2024 and, since last fall, natural gas. The dogs were copper, palladium and oil.
The latter’s flaccid performance last year was the reason that my pal Trader Ferg penned the following apologia to his fan base last month. But starting around December 7th , oil suddenly came to life. By Wednesday, it had risen by 15% in barely over a month (the last two days have, admittedly, produced a pull-back of about 2½%).
This brought its trailing 12-month return up to a respectable 23%, at least as measured by the main oil ETF. For sure, that has been aided by the positive “roll” on the underlying futures contracts but that was one of the positive attributes this newsletter highlighted.
Regardless, oil has been stuck in a trading range for over two years now. The leading energy ETF, XLE, has been as well, at least using 12/31/22 as the starting point. This means it has severely lagged the S&P 500’s two consecutive mid-20% return years. What tends to get forgotten, though, is that it absolutely crushed the S&P in 2022 when the broad market fell by 18.13% and XLE was up 64.17%. That’s the kind of hyper-muscular performance that deserves a breather.
Ironically, or not, it was the funeral-like sentiment Ferg refers to early in this note that set the stage for this out-of-the-blue rally. There’s no question energy investors were feeling blue indeed when his note went out into the blogosphere last month.
As you will read, Ferg correctly discloses the weak demand in China due to what looks like, to Team Haymaker, a deflationary bust similar to what Japan suffered 35 years ago. He also accurately describes the economic malaise currently afflicting Europe. Yet, per his comments, the developing world, outside of China, is a very different story.
Consumption in emerging countries continues to rise at a healthy clip. This is almost certainly why overall global oil demand hit a record of around 105 million barrels/day toward the end of 2024. (That factoid is courtesy of Cornerstone Analytics, one of our favorite energy authorities, and is not in Ferg’s article.)
Echoing a recurring Haymaker theme, Ferg is also appropriately highly critical of the International Energy Agency’s (IEA) abysmal statistical abilities (which strikes us more as disabilities). As we’ve frequently pointed out, the forecasting track record of the world’s leading official source of oil supply and demand statistics has been hysterically inaccurate. Quoting our friends at Goehring & Rozencwajg: “Ferg relays that the IEA’s cumulative undercounting of demand and overestimation of supply would make it the world’s 21st largest crude consumer.” (Emphasis added)
At the end of his note, Ferg gives you some specific names he likes.* We realize this is always a crowd-pleaser with our subscribers. Sharp-eyed readers may notice a name among them on which we previously provided some research. Like most energy equities, it hasn’t done much but it has been showing signs of perking up. An exception to this sector lethargy has been some of the natural gas producers which we highlighted in our Gas Pains MHM edition from last September. The returns on a few of those, plus natural gas itself, have been anything but painful.
*As always, we suggest you do your own research and consult with a financial advisor as necessary.
David “The Haymaker” Hay
Trader Ferg - Assessing Oil's Risk Reward
Going over the oil bear case and some repositioning
Ferg (originally published January 8th) - [Abbreviated version below]