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Bulls Call The Bottom In The Oil Market, But Are They Right?

Alex Kimani

The current year is likely to go down in the annals of stock trading as one that set the biggest records, both good and bad. It took a mere 20 days for the Dow Jones to descend into bear territory, making it the fastest slide in the history of the U.S. market thanks to the ravages of the worst pandemic in modern history. 

That's lightning-fast, considering that bear drawdowns over the past century have averaged ~156 days. 

Yet, the stock market has staged an almost equally sharp countertrend rally, managing to retrace nearly half of its losses in just 15 days.

Mega-cap growth ETFs such as the iShares S&P 500 Growth ETFVanguard Megacap Growth ETFInvesco S&P 500 Top 50 ETF, and iShares S&P 100 ETF have been seeing the biggest inflows, with a heavy weighting toward technology and tech heavyweights such as Apple Inc. (NASDAQ:AAPL), Amazon Inc.(NASDAQ:AMZN), Microsoft Corp. (NASDAQ:MSFT), Alphabet Inc. (NASDAQ:GOOG) and Facebook Inc. (NASDAQ:FB). Tech-heavy indexes such as the Nasdaq Composite (COMP) and the Invesco QQQ Trust (QQQ) have already turned positive for the year.

The curious thing is that investors are also betting heavily on two of the hardest-hit sectors: Energy and airlines.



Source: CNN Money

S&P 500

The energy sector's most popular benchmark, the Energy Select Sector Fund (XLE), has gained nearly 60% from its March 23 nadir, a level it last touched in December 2003, with the fund's shares outstanding climbing 45% in April alone. Meanwhile, the airline sector's proxy, U.S. Global Jets ETF(JETS)--a fund consisting mostly of American airline stocks--has seen its outstanding shares climb from 1.5 million at the end of March to more than 40 million shares currently.



Source: XLE

XLE

You can hardly fault the bulls, though, with crude oil on track to finish the best week in history. WTI Crude oil futures for June delivery (CL1:COM) have rallied 31% since Monday's to $24.04/barrel at 9am ET Friday, the biggest one-week gain by the contract since its inception in 1983.

The meteoric rise can be pinned on four factors:

- Early signs of an oil demand recovery, particularly in the U.S.

- OPEC+ ~9.7M barrels production cuts coming online in May

- Rapid independent curtailment by U.S. producers to the tune of ~1M barrels

- Saudi Arabia raising its official oil selling prices after lowering them two months ago after fisticuffs with the U.S. over market share

The Bears Disagree

But maybe the oil bulls need to pump their brakes.

Not everybody is buying the bullish narrative, with that much is evident from the market's biggest safe haven commodity--gold.

The gold market has continued its epic rise despite drastically lower demand in the key markets of China and India. Shares in the largest gold ETF, SPDR Gold Shares (GLD) have climbed 12.8% in the year-to-date, their highest since 2013 with the fund now boasting total assets worth a staggering $57.8B. It's smaller brethren, the iShares Gold Trust (IAU) have rallied 13.2% YTD, making gold one of the very few commodities in the green this year.

Powerful stock market rallies are seldom accompanied by similar moves in the gold market. It appears that gold punters are counting on simmering tensions between the U.S. and China over the former's criticism and accusations of the latter's handling of the ongoing pandemic to escalate into something worse--maybe as bad as the Cold War.

Although the worst in the oil market seems to be in the rearview mirror, the market is hardly out of the woods.

The International Energy Agency(IEA) has forecast that global energy demand for the entire year will be 6% lower than pre-crisis levels, or 7x bigger than during the 2008 financial crisis as well as the biggest in absolute terms in history. We simply have never been here before.

"It is still too early to determine the longer-term impacts, but the energy industry that emerges from this crisis will be significantly different from the one that came before," IEA Executive Director Fatih Birol has opined.

With some oil executives even predicting that oil demand may never fully recover, it's more prudent to err on the side of caution.

By Alex Kimani for Oilprice.com

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