Slippery oil picture

The energy sector’s subpar performance last week was no fluke, at least in terms of recent market history. Energy has been the third-weakest S&P 500 sector this year, the weakest over the past three months, and it’s the only one with a negative return over the past month. Those looking for an “explanation” will find it in one chart:

Oil prices may be higher on the year, but they haven’t done much since early April, and the past couple of months have been particularly choppy. After hitting a six-month intraday low on August 5, October WTI crude oil futures closed lower the next day before rattling off a four-day, 8.1% rebound. That move was reversed by a seven-day, 7.8% sell-off that concluded last Wednesday, which was in turn nearly erased by a three-day, 7.3% jump as of Monday.

While this indeed qualifies as volatile price action, it’s not without precedent in the oil market. For example, if we consider just the final two swings of this period—the seven-day, 7.8% loss and the three-day, 7.3% rally—crude oil has made 64 moves of this magnitude (or larger) since 1986.¹

Yesterday’s price decline was in line with the market’s “typical” performance after these swings—crude oil closed lower the next day 56% of the time, with a median return of -0.5%. Looking a little further out suggests that, all else being equal, the kind of volatility we’ve seen recently has sometimes been followed by more of the same.

For example, five trading days after the pattern, crude oil was higher 56% of the time, but after 10 days  it was lower 60% of the time, with a median return of -2%. That may give oil bulls pause about the market’s ability to build on its recent gains.

However, they may also be factoring in a larger issue.

Crude oil prices often ebb and flow with economic expectations—the healthier the outlook, the greater the perceived demand for oil. It’s probably no coincidence that oil’s early August lows occurred at the same time the stock market was selling off amid growing concerns (fueled by a surprisingly weak monthly jobs report) that the US economy may be cooling off too much.

Three weeks later, those concerns have moderated, but they haven’t disappeared—and any negative economic surprises have the potential to fuel volatility in the oil market as well as the stock market—particularly the energy sector.

Market Mover Update: Eli Lilly (LLY) has rebounded since selling off last month in the wake of Swiss pharma company Roche’s (RHHBY) announcement of positive test results for a weight-loss pill (see “Weight-loss news tips the scales”).

Despite falling to a three-month low in early August, LLY closed at an all-time high on Tuesday, and it was roughly 13% higher than it was on July 18 when the Roche news broke. Novo Nordisk (NVO), another leader in the injectable obesity drug space, also bounced back:

Morgan Stanley & Co. analysts added LLY to their “top picks” last week,¹ noting LLY “has the most robust new product cycle (and hence growth) outlook in Pharma as the company could launch five new drugs over the next two years.”²

Today’s numbers include (all times ET): mortgage applications (7 a.m.), EIA Petroleum Status Report (10:30 a.m.).

Today’ earnings include: Abercrombie & Fitch (ANF), Bath & Body Works (BBWI), Foot Locker (FL), Kohl's (KSS), J.M. Smucker (SJM), Affirm (AFRM), Salesforce (CRM), CrowdStrike (CRWD), Five Below (FIVE), HP (HPQ), NetApp (NTAP), Nvidia (NVDA), Abercrombie & Fitch (ANF).

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¹ Figures reflect WTI crude oil spot-market closing prices, 1986-2024. The pattern consisted of a three-day, 7%-or-larger rally, preceded by a seven-day, -7%-or-larger decline, where the low of the decline was also the lowest close in at least 10 trading days. Supporting document available upon request.
² MorganStanley.com. Our Top Stock Picks—North America Research. 8/21/24.