If history is any indication, we're heading for another bullish season in energy equities.
The North American energy sector typically has a period of seasonal strength between July 24th and October 3rd, according to Thackray's 2013 Investor's Guide. On average during the past 27 periods, the sector has outperformed the S&P 500 Index by 2.1 per cent. The period of seasonal strength coincides with price gains of crude oil from mid-June to the end of September and a drawdown in refined product inventories to annual seasonal lows.
What about this year? By some measures, the period of seasonal strength is starting earlier than usual. During last week and this one, the price of West Texas Intermediate crude broke above a series of resistance levels – at $97.35 (U.S.), $97.80 and $98.24 per barrel – to complete a bullish triangle pattern. Crude oil also recently moved above its 20, 50 and 200-day moving averages and has started to outperform the S&P 500 and TSX Composite Index.
However, energy equities and related exchange-traded funds have yet to respond significantly to recent strength in crude oil prices. North American energy equities are trading significantly below recent highs and have been underperforming the S&P 500 and TSX Compositive indexes. Look for a favourable change as the sector moves deeper into its period of seasonal strength.
Energy equities will respond to strong quarterly earnings released in late July and August, thanks to higher energy prices. Last year, crude oil prices averaged only $87 per barrel in the second quarter. Natural gas prices have risen to nearly $3.75 per million British thermal units (MBtu), up from an average of $2.40 per MBtu in last year's second quarter.
Why are energy prices moving so high? One reason for crude oil's strength is due to tensions in the Middle East, including the Syrian civil war and ongoing nuclear concerns with Iran. Further, natural gas prices have benefited from an accelerated switch to natural gas from coal by U.S. power plants.
The preferred investing strategy is to watch for an entry point for a seasonal trade when technical indicators turn positive. Owning ETFs in the sector is preferred due to their diversified nature.
A wide variety of energy-related ETFs – as well as crude oil, natural gas and gasoline – are available on North American equity exchanges. U.S. exchanges list 27 energy ETFs. You can find a list of them here. Another 25 U.S.-based ETFs trade oil, natural gas and gasoline. You can find them here. The most actively traded U.S.-listed ETF is the Energy Select Sector SPDR. Canadian exchanges list seven energy ETFs and 11 oil and natural gas ETFs. The most actively traded Canadian energy ETF is iShares on the S&P/TSX Capped Energy Index.
Don Vialoux is the author of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. Daily reports are available at http://www.timingthemarket.ca/. He is also a research analyst for Horizons Investment Management Inc. All of the views expressed herein are his personal views although they may be reflected in positions or transactions in the various client portfolios managed by Horizons Investment Management.
Don Vialoux