The genesis for today's move was last night's weekly report from the U.S. Energy Information Administration, which showed a drop in domestic production from 9.789 million barrels per day two weeks ago to 9.754 mmbpd last week. That may seem like a minuscule decline--and it is--but the key is that traders have been predicting U.S. oil production would break through the 10 million barrels per day mark, and last week it did not.
Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Friday, Nov. 24, 2017. A rally in oil and retail optimism buoyed U.S. stocks at the traditional start of the American holiday shopping season. Photographer: Michael Nagle/Bloomberg
So, that's the key. Sentiment on crude futures has changed to decidedly bullish, and that outweighs any individual data point. I can't even count how many times during 2015 and early 2016 that I saw a bullish data point ignored by energy traders in the midst of overwhelmingly negative sentiment in crude. Well, that bias works in either direction, and that's what we are seeing today.
The last group to change its mind on a commodity is always the community of equity portfolio managers. I have been dealing institutional buy-siders for the past 25 years, and they are a conservative lot, prone to herd mentality. The gung ho attitude in the energy pits just is not evident in most buy-side morning meetings.
When sector rotation happens, however, it is quick, pronounced and deadly to those short a previously out-of-favor sector. I believe that movement has begun in for the energy sector in December and will play out fully in 2018.
Simply put, I believe energy is the new Nasdaq. The astronomical returns in 2017 from megacaps like Facebook, Apple, Amazon, Netflix and Google (Alphabet)--which are simply staggering in sheer dollar terms--can and will be replicated among oil producers. The little guys will move first--and as noted in my Forbes column earlier this week, that has already begun--but the Nasdaq's performance in 2017 shows us that blue chips can absorb mania just as easily as small caps can.
So, I am predicting that ExxonMobil, Chevron, ConocoPhillips, BP, and Royal Dutch will be the FAANG of 2018. Higher global prices for oil--watch for a move upward in natural gas pricing, as well--will be the tailwind that drives energy stocks to outperformance next year. You should be overweight energy in your portfolio, and as portfolio managers gradually move to that status, you will have beaten them to the punch.
">The oil bulls are running on the last trading day of 2017. After flirting with the mark several times this week, front-month WTI futures are solidly above $60 per barrel in Asian trading this morning. I called this move in oil in an earlier Forbes column with the tag "real and spectacular" and I believe this bull run in energy prices will continue into 2018.
The genesis for today's move was last night's weekly report from the U.S. Energy Information Administration, which showed a drop in domestic production from 9.789 million barrels per day two weeks ago to 9.754 mmbpd last week. That may seem like a minuscule decline--and it is--but the key is that traders have been predicting U.S. oil production would break through the 10 million barrels per day mark, and last week it did not.
Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Friday, Nov. 24, 2017. A rally in oil and retail optimism buoyed U.S. stocks at the traditional start of the American holiday shopping season. Photographer: Michael Nagle/Bloomberg
So, that's the key. Sentiment on crude futures has changed to decidedly bullish, and that outweighs any individual data point. I can't even count how many times during 2015 and early 2016 that I saw a bullish data point ignored by energy traders in the midst of overwhelmingly negative sentiment in crude. Well, that bias works in either direction, and that's what we are seeing today.
The last group to change its mind on a commodity is always the community of equity portfolio managers. I have been dealing institutional buy-siders for the past 25 years, and they are a conservative lot, prone to herd mentality. The gung ho attitude in the energy pits just is not evident in most buy-side morning meetings.
When sector rotation happens, however, it is quick, pronounced and deadly to those short a previously out-of-favor sector. I believe that movement has begun in for the energy sector in December and will play out fully in 2018.
Simply put, I believe energy is the new Nasdaq. The astronomical returns in 2017 from megacaps like Facebook, Apple, Amazon, Netflix and Google (Alphabet)--which are simply staggering in sheer dollar terms--can and will be replicated among oil producers. The little guys will move first--and as noted in my Forbes column earlier this week, that has already begun--but the Nasdaq's performance in 2017 shows us that blue chips can absorb mania just as easily as small caps can.
So, I am predicting that ExxonMobil, Chevron, ConocoPhillips, BP, and Royal Dutch will be the FAANG of 2018. Higher global prices for oil--watch for a move upward in natural gas pricing, as well--will be the tailwind that drives energy stocks to outperformance next year. You should be overweight energy in your portfolio, and as portfolio managers gradually move to that status, you will have beaten them to the punch.
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