Are You A Believer In The Oil Hype?

The geopolitical backdrop in the Middle East is fluid to say the least, and this fluidity has helped the black fluid undertake what is looking like a potential upside breakout as the news/noise levels remain high.  But do you believe the hype?
In this article we check out a chart that raises potentially more questions than it answers on the oil markets.  The chart in question comes from the latest edition of the Weekly Macro Themes report.

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The chart shows the oil price against S&P500 energy sector relative performance.  At first glance it looks like energy stock investors believe in a different story than oil traders.

There's probably 2 main possible interpretations of this chart: a. Oil traders are right and the energy sector is overdue for some outperformance after a period of relative underperformance; or b. Energy stock traders are right and the oil price breakout is a fakeout.
The answer will of course only be known in hindsight with the passage of time. But we as investors unfortunately can't make use of hindsight or hope in investment strategy, so let's review the weight of risks.
Looking across the rest of my indicators on crude oil prices I can see short-term negative seasonality headwinds, crowded long speculative futures positioning, bearish patterns in oil market implied volatility, US oil production at a record high, and of course the conflicting signals in the S&P500 energy sector.
That along with the point that geopolitical risk is a 2-sided coin with upside and downside risks, means to me the weight of risks based on what I can observe right now is to the downside.  I have no edge in predicting or prophesying whether a large scale conflict may occur, but I do have a good set of charts and indicators across multiple variables and they tell me not to believe the hype.
This article originally appeared as a submission at See It Market
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Topdown Charts: "chart driven macro insights" Based in Queenstown, New Zealand, Topdown Charts brings you independent research and analysis on global macro themes and trends. Topdown Charts covers multiple economies, markets, and asset classes with a distinct chart-driven focus. We are not bound by technical or fundamental dogma, and instead look to leverage any relevant factor to capture the theme. As such, here you will find some posts that are purely technical strategy, some that just cover economics and data, and some posts that use multiple inputs to tell the story and identify the opportunities. Callum Thomas Head of Research Callum is the founder of Topdown Charts. He previously worked in investment strategy and asset allocation at AMP Capital in the Multi-Asset division. Callum has a passion for global macro investing and has developed strong research and analytical expertise across economies and asset classes. Callum's approach is to utilise a blend of factors to inform the macro view.