Energy prices have come down across the board, as Crude Oil (CL/) has descended to its lowest level since January 2022. According to producers like OPEC+, the physical market for Oil has remained tight, in addition the cartel announced a production cut of 100k bpd (barrels per day) to maintain “price stability”, as many members already missed their production quotas. The production cut was more symbolic to show the cartel’s willingness to cut production as price volatility in the paper market does not currently reflect the physical market, according to multiple sources within OPEC+ (Bloomberg). One of the largest drivers behind the fall in crude oil prices has been coming China, as they have stifled travel in recent weeks due to China lockdowns. Since 2020, China has gone through multiple sessions of shutting down and reopening. This time it lines up with the second-most important holiday season, the mid-autumn festival. The sharp declines in energy demand due to the lockdowns have been felt in the energy markets with Saudi Arabia cutting oil prices for Asia (Bloomberg).
While oil prices have fallen rapidly, equity-related areas have held up well relative to the spot commodity price. The Energy Select Sector SPDR Fund (XLE) did reflect a “sell” signal on its chart, but still has maintained a very solid score, and is up over 40% year-to-date. Given the macro environment and its instability, commodity prices will likely stay volatile for some time, both to the downside and upside, & should be expected to continue. Just a few months ago, XLE was trading at $93 and sold off to $66 in a little over a month of trading, so risk management is key for those invested in the space. Covered writes are a good way to generate income from the volatility while still maintaining a bullish stance in the space. One doesn’t have to sell calls against their entire position either, since one may not want to get called away from their entire position, but it is still a solid strategy to profit off the volatility and strength in the space.
Fixed Income Update:
US Treasury yields have continued to rise over the last week. The US Treasury 10-year Yield Index (TNX) have a sixth consecutive buy signal on Tuesday (9/6) when it broke a double top at 3.3% and continued higher, reaching 3.35%. TNX reversed down on Wednesday but remains on an upward signal. WE see the 10-year Yield Index pricing in a move to 4.8%.
The rise in yields has put downward pressure on bond prices. During Tuesday’s trading, the iShares US Core Bond ETF (AGG) gave a fourth consecutive descending signal when it broke a double bottom at $99.60, this action has now taken out all but one level of support it has found this year. This widely utilized passive income index. WE are tracking AGG to reach to a price level of 94.80$. Year to date performance for the unit price AGG is -12.25%. The fed funds futures market is now pricing in approximately a 75% chance of a 75-basis point rate increase at the Fed’s September meeting in two weeks; perhaps the reason why we are seeing the trend for traditional Fixed Income continue its’ downward move.
Pina Formicola, AWMA, AIF