Crude Oil Is In A Bear Market; Now What?

It has been a rough year so far for crude oil with yesterday’s close at a fresh nine-month low officially pushing the commodity into bear market territory. Sparking much of the continued weakness is the usual worry that rising supply from the U.S. and Libya will continue to offset production cuts from the Organization of Petroleum Exporting Countries (OPEC).

Per Ryan Detrick, Senior Market Strategist, “Crude oil moving into bear market territory has many concerned that this is a sign of a potential global economic slowdown. We don’t see it that way, as this pullback has been, and continues to be, supply-driven, as opposed to demand-driven. Also, crude oil in a bear market is not uncommon, as 35% of the time since 1985 it has traded at least 20% off its trailing 52-week high.”

The last time crude oil was officially in a bear market was in early August of last year. As the chart below shows, this was one of the longest streaks without crude oil having a bear market.

So, what does it mean? Crude is in a bear market; so what? Well, historically the future returns have been much better when crude was in a bear market than when it wasn’t. In fact, a year out, crude has been up 18.1% on average when it was in a bear market versus up only 1.1% if it wasn’t.

As we noted in our newly released Midyear Outlook 2017: A Shift In Market Control publication, one of our favorite plays in the energy group is via master limited partnerships (MLP). Overall, the Trump administration’s stance on energy deregulation is supportive and yields on MLPs remain very attractive, though further crude oil weakness and interest rate risk remain potential headwinds. For a more detailed look at MLPs, check out this recent Weekly Market Commentary.

 

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