The Rally Of The Junk Is Over And What This Means For Energy Stocks Going Forward
Last week, I published a report titled, "The market price action the last two days tell you everything you need to know about where we are headed." Please have a chance to read that report first before reading this one.
Fast forwarding to a week later, US implied gasoline demand is showing signs of recovering. The US implied oil demand is also recovering and the recent drop in oil has indicated demand is supported at these oil prices ($115 to $117 crude + 3-2-1).
Why is this important and why does this matter to the rally in tech stocks?
As we wrote last week, there is a narrative battle in the markets today. We said:
To clarify once again, we believe there are two prevailing market narratives in conflict today:
The Fed is successful in fending off inflation or unsuccessful.
Oil price demand destruction vs oil price demand rebound.
Looking at the market reaction to the CPI print of 8.5% yesterday, it told me the following:
Nasdaq staged a massive rally as investors expect inflation to have peaked, and as a result, the Fed will slow down the rate hikes.
But I need you to step back for a minute and think this through. One of the key reasons why CPI disappointed to the downside was because energy prices fell materially month-over-month. And the key reason why energy prices disappointed to the downside was that high oil prices resulted in demand destruction.
Given that elevated price was the reason for demand destruction (not the Fed's interest rate hikes), then the opposite logic also applies. Lower prices will help stimulate demand. This is precisely the yo-yo supply and demand dynamics we talked about in this write-up in June.
We then concluded the article by saying:
Once the oil market gets a whiff that demand has bottomed, then it's all upside for oil traders from there. Now there's a floor they can rely on and they can push the upper boundaries with no one to stop them. For energy equity valuations, the floor will serve as the new catalyst for the reevaluation in trading multiples. No longer will people be using $65/bbl to $70/bbl as a gauge for value.
We think that day is coming and coming soon.
For now, let the market cheer over the end of the bear market. For those of you that anticipated this bear market rally, you know what's next. Once we get confirmation that oil demand is indeed bottoming and recovering, it will be time for the next phase of the trade.
Well... the market is getting a whiff of that demand-bottoming signal. One of the key things holding back tech from imploding right away and oil shooting higher is the Iran situation. And depending on how the Iranian situation gets resolved, the next step of the market is clear.
Hypothetically, if an Iran deal is agreed upon, tech stocks would stage another temporary rally with oil and energy stocks selling off. We've already written that Iran would add 1 to 1.4 million b/d to the market. But with the recent demand improvement, we are revising our model to reflect this.