Swissquote: Texas energy crisis deepens, but oil gives toppish signs

February 16, 2021

By Ipek Ozkardeskaya, Senior Analyst at Swissquote.

The rally in stock markets continue with bubble warnings popping up everywhere for all-size and all-industry stocks. The disconnect between price-to-earnings and price-to-sales ratios have not gone so big since the dot.com crisis and the actual bull run could actually end in tears. 

Warnings per se won’t stop equity bulls from craving for more. But they throw a foundation to send asset prices quickly to the bottom once the dive begins: as the fear of a bubble burst is building stronger, the slightest sign of correction would get the bulls rushing to the exit and wreak havoc across the risk assets.

Anyway, we are not there just yet. The European indices made a solid positive start to the week. The FTSE 100 closed 2.52% up, led higher by energy, commodity and bank stocks. Asia traded in the green despite news of a new lockdown in New Zealand’s Auckland.

Activity in US and European equity futures hints at consolidation and extension of gains on Tuesday, as well.

On the field, the mood is less cheery. Texas is being ravaged by an unusual deep freeze, and out of munition to fight back the freezing weather.

US crude shows toppish signs above the $60 per barrel, even with the growing energy crisis in Texas. The blackout in Texas now spreads to Mexico, leaving 4 million homes and businesses, and the country’s biggest oil refinery powerless. But because the Texas boost in energy demand, and up to a million-barrel-drop in daily supply are temporary, levels above $60 look attractive to top-sellers. A downside correction could easily kick in and pull prices below the $55 per barrel, but should not damage the medium-term positive trend in oil prices.

The US dollar remains soft across the board. The EURUSD tests the 50-day moving average resistance to the upside, as Cable is about to hit the 1.40 mark for the first time since April 2018. And nothing could discourage the GBP-bulls from running higher – dovish stance from the Bank of England (BoE), possibility of negative rates, soft inflation data, or ballooning government debt remain secondary as investors who sold the Brexit fears are now buying the post-Brexit relief. In fact, sterling pound has more to recover from pre-Brexit years. If investors are convinced that the country won’t sink to the bottom as a result of the European divorce, then looking for a further medium-term recovery to 1.50 is not far stretched.

Gold slips with the rising long-term US treasury yields. We could see a deeper downside correction toward the $1800 per oz, but the rising fears of a potential equity bubble burst should keep the downside limited.