Let’s take a look beyond today’s drop in oil on jitters about Thursday’s OPEC meeting and that group’s decision on extending (or not) its cuts in production. Today West Texas Intermediate, the U.S.crude benchmark, is down 1.37% as of 1 :30 to $58.14 a barrel.
But on Friday oil futures hit a 29-month high. That took West Texas Intermediate to a gain of 8.5% in 2017 to date.
However, energy stocks in the Standard & Poor’s 500 are off 9.8% for the year. A pretty shocking decline given that the S&P 500 itself is up more than 16% for 2017. And given that energy stocks normally go up when the price of oil rises.
So what gives? How do we explain the decline in energy shares at the same time as oil prices are rising?
The simplest explanation, I think, comes down to time.
Oil futures are short-term instruments. The price for West Texas Intermediate quoted for today is actually the price of oil in the futures market for January 2018 delivery. That’s not especially far out and I think it’s reasonable to think that oil will be higher in January and that OPEC production cuts will still be in force by then.
Oil shares, though, trade on longer-term expectations. Even if it’s hard to pin down the exact duration of those expectations, I think it’s safe to say that the price for shares of ExxonMobil (XOM) or Pioneer Natural Resources (PXD) extend beyond a January horizon.
In that longer horizon oil traders see projections of rising U.S. production from shale geologies driving down oil prices–through 2025, the International Energy Agency says. They see flattish demand growth delaying the elimination of a surplus of global supply. They worry about the unpredictability introduced into the market by growth in sales of electric vehicles and efforts to reduce global use of carbon fuels to fight global warming.
The difference in the direction of short-term futures and long-term equities, from this point of view, is a reflection of an oil market that is faced with very large scale uncertainty over longer time frames.