Oil prices have dropped below a key threshold for the first time in 7 months but it doesn't spell the end for growth in energy stocks, research firm says
- West Texas Intermediate crude has fallen below its 200-day moving average for the first in seven months.
- WTI oil had been above that average for 152 trading days before falling sharply in the previous session.
US oil futures on Tuesday traded below $95 a barrel, with that price in focus after the commodity in the previous session broke a lengthy run above its 200 day moving average.
But the move won't necessarily result in a downturn in the S&P 500's energy sector, Bespoke Investment Group said Tuesday. Energy has been the strongest of the equity index's 11 sectors so far in 2022.
West Texas Intermediate crude tumbled by nearly 5% on Monday to settle at $93.89 a barrel. The loss marked the first time since December 2021 that WTI traded below its 200-day moving average. Breaks above or below moving averages can give investors a signal of upcoming price trends.
The latest streak stretched for 152 trading days and ranked as the 12th longest dating back to the early 1980s, the independent research firm said in a note. The 200 DMA streak "also started less than a month after a 269-trading day streak that ended on 11/24/21 when fears of Omicron first surfaced," it said. "In other words, it has been a pretty strong run for crude oil."
Investors have been knocking down oil prices largely on fears about an economic slowdown. The US government last week said US gross domestic product shrank by 0.9% in a preliminary second-quarter reading. Activity shrank by 1.6% in the first quarter, leaving the world's largest economy on track toward a technical recession.
WTI crude was still up about 25% for the year as of Tuesday, and such gains have helped push the S&P 500 energy sector up by 39%. The S&P 500 utilities group has been the only other sector to rise this year, up by more than 3%.
"In the current environment, seeing oil prices decline and break below their 200-DMA would lead many to speculate that the prospects for oil and oil-related stocks were poor with a more positive outlook for the broader stock market," said Bespoke. "Based on experience and especially over the short term, though, the opposite has tended to be the case."
Bespoke provided a table of the energy sector's performance after WTI oil broke streaks above its 200-DMA. In one month and six months out, the group advanced six out of 11 years, or rates of 54.5% in the respective periods.
The positive percentage rate increased to 63.6% six months out, including the sector's surge in value by 59.8% as of late November 2021. A year out, the sector had recorded gains 60% of the time.
Oil prices edged up on Tuesday, ahead of OPEC's meeting about production quotas on Wednesday.
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