Friday, November 12, 2010

Musings: Energy Stocks Have Mostly Trailed the Market This Year

The results of the November 2nd election and the recent Federal Reserve Bank’s announcement that it was embarking on another attempt to stimulate the economy by encouraging bank lending through a program to provide more liquidity to the banking system, known as the second quantitative easing, or QE2, have driven the stock market to levels that existed immediately before the collapse of Lehman Brothers. Accompanying the QE2 announcement, the worth of the United States dollar among world currencies fell in value helping to boost the price of commodities including crude oil. Natural gas prices in the U.S. have not benefited from the weakening dollar as the product is truly a local one.

When we look at the performance so far in 2010 for the overall stock market, as measured by the Standard & Poor’s 500 Stock Price Index, it has been solid. The S&P 500 index is up nearly 10% through the end of last week, and is at a level exceeding that achieved in late spring this year. But when we look at the performance of energy stocks, they have tended to lag the performance of the overall stock market despite the strong impetuous from commodity prices.

If we look at what has happened this year in energy markets, there have been two primary events that have shaped the business, the Gulf of Mexico oil spill disaster and the recovery in economy activity following the 2008-2009 recession. While energy demand has recovered from the drastic drop experienced last year due to the recession, the combination of rising supply and continued subpar economic growth and energy demand in the industrialized economies of the world has muted the magnitude of the oil price rise. Crude oil is denominated in U.S. dollars globally, and its price is impacted by the fluctuating value of the U.S. dollar. At various points in time during the year oil prices rose or fell sharply in response to movements in the value of the dollar, however, there was no sustained move in......Read the entire article.

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