Crude oil and energy equities have been on a tear for the last two years. But now we are seeing some divergences between oil prices and other related variables. First, as everyone knows, oil prices have been the main driver of rising bond yields this year. Specifically, the transmission mechanism has been via the inflation risk premium—a component of the term premium. The inflation risk premium has faded by over 30bps in the last couple months.
Second, while oil prices continue to march higher, US Treasury volatility has retreated by about 30bps in the last month.
Lastly, oil prices tend to track commercial crude inventories fairly closely. Inventories have been mostly flat all year while prices have surged. Given the historic relationship between inventories and price, crude should be trading under $80/barrel.
Given hostilities in Ukraine, and anticipated production/export declines in Russian crude, it is possible the divergence can simply be explained as a geopolitical premium. For now at least, the US bond market seems to have priced in the move back to the March 8 high of $123.70/barrel. If oil breaks out above that high, it would seem likely US Treasury yields have another leg higher, with the inflation risk premium and volatility rising in tandem.
On the other hand, as Carter Worth pointed out in a note today, Exxon Mobil just closed its last gap from 2014, which may indicate that energy stocks have discounted peak oil prices, possibly similar to the US Treasury market.
Source: Worth Charting, 6/7/22
As of 3/31/22, Exxon Mobil Corp was held in the Knowledge Leaders Strategy.