Crude Realities – Oil will go higher

When we started the month, the world could not get enough of a good thing. OIL! Have a look at the US Small Cap Energy Index below:

Source: VIP Wealth Solutions & Bloomberg

However, the market, in its short term thinking, has retreated back to a more complacent posturing. Does this have any meaning? We think so. Consider that oil is now in the mid $40s and some time ago oil was at or near $100. We know from history that energy and commodities have a long term cyclical nature. REMEMBER LONG TERM?! The proof of this is a longer view of the energy construct.

Consider the longer term chart below of oil. The orange circles below represent point of distribution or selling opportunities and the green circles below suggest points of accumulation. It would be too simplified to use this as a measure of buy and sell points. WHY? Basically this is a historical view, and we know what happened after we inserted the circles.

Source: VIP Wealth Solutions & Bloomberg

This begs the question, “What will happen to oil tomorrow?” Heads or tails. We cannot tell you that, but over longer term periods of time, accumulation of energy at lower cyclical points provided opportunities for distribution at future higher points. Is this a case for accumulation of energy at this level, or just an alternative view?

The answer to the above question can sometimes be seen in fund flows. This is not a perfect science or an art form, but it helps paint the picture of what is happening in global markets. We have isolated a few factors to provide a better illustration. Consider that the data below shows, in a very isolated way, the flow out of the NASDAQ Biotech sector and into the Energy sector. In isolation, this has some meaning; however, there are reams of other data and fund flows that need to be considered before diving into the energy sector.

The bottom line, in this type of assessment, is that there is some rotation happening and paying some attention to this rotation is meaningful.

In wrapping this up, there is plenty of evidence that continues to suggest that there are quick and aggressive dislocations of assets from one sector to another. Energy will remain one of those global macro assets that will have multiple levers of change. We continue to watch it closely.

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Assumptions, opinions and estimates constitute the author's judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. The comments contained herein are general in nature and are not intended to be, nor should be construed to be, legal or tax advice to any particular individual. Accordingly, individuals should consult their own legal or tax advisors for advice with respect to the tax consequences to them, having regard to their own particular circumstances. Richardson GMP Limited is a member of Canadian Investor Protection Fund. Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.