Energy stocks drop about 2% after EIA inventories only slightly more than expected. Signal investors are skittish

Yesterday's action in the oil and gas names was surprisingly negative considering how minor the apparent news behind the move was. Whenever the stock trading looks odd compared to the news flow, it can indicate an important shift in psychology. In other words, if the market fails to go down in the face of bad news, or it goes down despite good news, it can be a key clue.

Yesterday (4/6/11) there was widespread price weakness in equities in the energy sector and the closely-correlated agriculture sector. with a number of ETFs falling around 2%, while the overall market rose about 0.2%. This pullback took these equities back to where they were about a week earlier. The sector ought to be watched closely to see whether this is the beginning of a downtrend, or just a temporary overreaction to what seems like a minor bit of news. The trigger was a weekly report from the EIA on petroleum inventories, which came out as scheduled at 10:30 am Wednesday. The closely watched US commericial crude oil inventories (excluding the SPR) was up 2 million barrels to 357.7 million barrels from 355.7 the week before and 1.5 million barrels higher than the same week a year ago. That small change, up 0.6%, compares to an expected rise of 1.6 million. Thus the magnitude of the "surprise" was only 0.4 million barrels. That amount represents about half an hour of the the total petroleum and products used by the US economy at the current rate of 19 millions barrels per day. Below is a chart showing how the inventories have been trending, including this most recent data point for the week ended April 1.

Inventories are above the normal range now, but that is not new. They have been above, or at the high end of, the average range for the past two years. The EIA report did not seem to have much effect on oil prices themselves. Here is what the WSJ reported about futures prices.

"Light, sweet crude for May delivery was up 15 cents to $108.49 on the New York Mercantile Exchange following the report. Front-month May reformulated gasoline blendstock, or RBOB, dropped 1.25 cents to $3.1888 a gallon. May heating oil rose 0.97 cent to $3.1947 a gallon."

Below is a chart from yesterday's EIA report of oil and product spot prices since January 2010. The green line is the WTI crude oil series that was $108.49 as noted in the WSJ report. In this chart, the scales are set so that the dollars per gallon on the left are exactly 1/42 of the dollars per barrel on the right hand scale, reflecting the fact that one barrel equals 42 gallons. Thus, gasoline (red line)and heating oil prices (red line), in dollars per gallon, can be viewed on the same chart as oil prices in dollars per barrel.

The equity markets had a much different reaction to the EIA data than the oil markets themselves. Starting right about 10:30 am eastern time, when the data were released, most equities tied to energy and agricultural companies weakened.
The first chart below shows a year of daily prices. The main index shown with candlestick bars is hte PowerShares S&P Small Cap Energy portfolio. The scale is % change so that multiple indexes can be compared. The lines represent a variety of energy and agriculture ETFs, and these have all been fairly closely correlated and have been moving up as oil prices have moved up. Note that the last point shows a small downtick on each of the series. This reflects the reaction to the EIA data. The symbols of the various ETFs shown in the chart, for thoese who care about details, are OIH,OSX, VDE, XLE, MOO, DBA, and XOI.

To get a clearer picture of the timing of the move down, we zoom in on the last 10 days of data shown in ten minute intervals in the chart below. The same PSCE ETF compared to the same 7 related ETFs are shown. Ignore the first two bars of the PSCE ETF for April 6 as there was some anomalous trading in the first half hour or so. Then, from 10:30 am Wednesday until about the middle of the day there was a significant drop in all of these price series that takes them back to about where they had been a week or so ago. There is a small rise in the second half of the trading day for most, but they close well below the prior day closes and the opening prices.

In conclusion, we saw energy equities, which have been rising strongly since about August 2010, hit with selling pressure in reaction to a seeminly very small surprise that crude oil inventories were higher than expected by about 30 minutes of all petroleum usage. Since the fundamentals of the situation do not match up with the technicals, something psychological seems to be going on. We know that investors can panic and the herd can move in a new direction even though the news cannot explain it. This bears watching.