The performance of most markets for the 2018 calendar year remains near zero. Leading the pack over the last two weeks have been oil and energy stocks, which accelerated their strength that began over a month ago. The sector seems to have momentum on its side, especially when it comes to energy securities.
The price of oil has uncharacteristically performed much better than energy securities this year. As this is not usually the case, it's reasonable to expect this gap to close in the future, especially when it comes to energy securities.
Although not a perfect storm, a number of factors have influenced oil's performance. Inventories have fallen dramatically in OECD (Organization for Economic Co-operation and Development) countries; the supply of oil by OPEC (Organization of Petroleum Exporting Countries) members has surprisingly stayed within targets; China, the world's biggest importer of oil, has increased the amount of oil it is processing; Venezuela is pumping considerably less oil given their economic troubles; increased tensions in the Middle East; and global demand for oil has increased.
On the other side, energy flow from U.S. shale producers has risen and expectations are for even higher levels in the future. This has also broadened the divide between the two different types of oil traded on global markets. Brent crude, which is produced and delivered largely to international customers, is about eight dollars per barrel higher than sweet crude, which is more commonly produced and consumed within the U.S.
Expectations support the thesis that energy prices and securities should rise in the future. However, as things can change quickly, so can this notion.
As one might expect, with energy stocks comprising almost 20% of the Canadian stock market valuation, the TSX has benefited from rising oil prices. For the first time in some time, the TSX is close to breaking even for the year. This strength should continue, as valuations on the TSX are lower than many other global markets.