Crude Oil Is In a Bear Market; Now What?

by Ryan Detrick, LPL Research

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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IMPORTANT DISCLOSURES
Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.
The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.
The economic forecasts set forth in the presentation may not develop as predicted.
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.
The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.
Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, geopolitical events, and regulatory developments.
Additional management fees and other expenses are associated with investing in MLP funds.
This research material has been prepared by LPL Financial LLC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and make no representation with respect to such entity.
Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit
Securities and Advisory services offered through LPL Financial LLC, a Registered Investment Advisor Member FINRA/SIPC
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Copyright © LPL Research

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