PRICE OF NATURAL GAS FALLS TO FOUR-YEAR LOW -- ETFS WITH NAT GAS EXPOSURE HAVE WEAKER YEAR -- THAT INCLUDES OIL & GAS EXPLORATION & PRODUCTION AND OIL SERVICES
ENERGY STILL IN DECLINE... Despite today's snapback bounce in global stocks, one sector continues to weaken. And that's the energy sector. Chart 1 shows the Energy Sector SPDR (XLE) falling further below its 50- and 200-day moving averages today. And that's in a rising stock market, which makes its relative performance look even worse. The solid line shows the XLE/SPX ratio falling to the lowest level in a year. Most of today's selling is probably coming from a more than -2% drop in the price of crude oil. Chart 2 shows the United States Oil Fund (USO) slipping below its 200-day line as well. Most of the commentary on the weak energy sector, however, is usually focused on the price of crude oil. The fact is that a weak natural gas market has been the biggest drag on energy stocks over the past year.
NATURAL GAS DROPS TO FOUR-YEAR LOW...The energy sector includes large cap stocks in the oil and gas industry. That includes stocks tied to natural gas. Chart 3 compares the price of natural gas (gray bars) to WTIC crude oil over the last four years (through yesterday). And it shows nat gas being the much weaker of the two. The last gray weekly bar shows the price of natural gas dropping yesterday to the lowest level in four years. By comparison, the price of crude oil has held up much better. The disparity between the two has gotten even worse over the past year. While the price of crude gained +6%, natural gas fell -45%. The Energy SPDR lost -3% over the same time span. The big drop in natural gas is reflected in the much weaker performance of natural gas shares this past year.
NATURAL GAS STOCKS UNDERPERFORM XLE...Chart 4 shows the NYSE Natural Gas Index ($XNG) having a much worse year than the Energy SPDR (XLE). The XNG is made up of stocks tied to the production of natural gas. And it lost -26% over the last year compared to -3% in the XLE. That much weaker performance in natural gas stocks may also explain the past year's much weaker performance in a couple of other energy ETFs.
OIL & GAS EXPLORATION AND PRODUCTION AND OIL SERVICES ALSO HAD WEAK YEAR... Chart 5 show the S&P Oil and Gas Exploration and Production SPDR (XOP) also having a relatively weak year. The XOP lost -30% over the past year making it the weakest energy ETF. As its name implies, The XOP includes stocks that produce crude oil and natural gas. Chart 6 shows the VanEck Vectors Oil Services ETF (OIH) dropping -27% over the last year. That's only slightly less than the XOP loss of -30%, but a lot more than the XLE loss of -3%. All of which suggests that the weak natural gas market has been a big depressant on the energy sector over the last year. The following footnote explains why a weak natural gas market is hurting oil service stocks.
FOOTNOTE --WSJ REPORTS REDUCTION IN OIL FIELD SPENDING... The Wall Street Journal reported today thatHalliburton(one of the largest oil-field service companies) reported on Tuesday a 2019 loss on a decline in revenue blamed on diminished drilling in North America. With gas prices in the U.S. below break even levels, the company expects a reduction in oil-field service spending this year, with the bulk of those cuts coming in gas-producing regions. The Journal further reports that Schlumberger (SLB) said that it too was pulling back in North America.
