Oil Prices vs Energy Stocks

jamesmith

Oil Prices vs Energy Stocks
FRIDAY, FEBRUARY 24, 2012 AT 07:55AM
Earlier this week we highlighted the growing divergence between the Dow Jones Industrial Average and the Dow Transports.  While it is a negative divergence on a technical basis, given the breakout in the price of oil in recent days, it is understandable that the Transports would be underperforming.

While Transports are big consumers of oil and see a negative impact from higher energy prices, energy producers who sell the energy should see a positive impact, and that is what we have been seeing...to a degree.  

The chart below compares the recent performance of the S&P 500 Energy sector and the price of oil.  As shown, both oil prices and the Energy sector bottomed out in October and have seen strong rallies ever since.  If you look more closely at the chart, however, it shows that the Energy sector has been underperforming the price of oil.  

Since their lows last Fall, the price of oil has risen 43.3%, while the S&P 500 Energy sector is up 31.6%.  Neither return is all that shabby for such a short period of time, but there is a modest divergence beginning to form between the two.  Oil has now cleared several potential resistance areas and is close to its highs from 2011.  The Energy sector, on the other hand, only just recently traded above its highs from November and still has to get through its highs from July before it can attempt a breakout above its 2011 highs from April.

Although the underperformance of the Energy sector compared to oil is nothing major at this point, it does reinforce the fact that just because a producer sees an increase in the price of the commodity it sells, that increase doesn't necessarily mean the stocks of those companies will see commensurate returns.  In the commodity sector especially, companies also face potential headwinds labor costs, production costs, and regulatory risk.

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