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By Lewis Krauskopf
NEW YORK (Reuters) – Investors betting on US energy stocks rallied rapidly as the sector leads upside and economically sensitive stocks that have hit the stock market. How far along this run could depend on the success of the economic recovery, the dynamism of supply in the oil markets, and whether companies can remain disciplined in their spending. The nearly doubling in the price of crude oil has helped equities of oil and gas companies – a losing bet for years – become one of the best-performing areas in the market, with oversized gains on stocks of companies like Oil Major Exxon Mobil Corp (NYSE 🙂 and Diamondback (NASDAQ 🙂 Energy Inc, which are up 89% and 231%, respectively, since early November.
With over 80% growth over that time, the energy sector is back to the levels it was in February 2020 when the stock market began its slump as the COVID-19 outbreak hit the economy.
“Stocks are being offered because there is an expectation of higher demand,” said Michael Arone, chief investment strategist for Federal road (NYSE 🙂 Global Advisor. “We need to see the follow-up.”
The outlook for energy stocks takes center stage on a number of market themes, including how long economic “reopening” trading can last, whether energy and other value stocks continue to outperform technology and growth shares, and whether the market is poised for a potential surge of inflation. With the benchmark index S&P 500 nearing 4,000 levels for the first time, the health of the economy, the rate of inflation and a recent spike in bond yields are likely to be hot topics when the Federal Reserve meets on Tuesday and Wednesday.
Adequate crude oil supplies, which weighed on global oil prices, and concerns about a “green energy” push were among the factors that weighed on energy supplies for most of the last decade. Oil prices fell in the coronavirus-induced downturn due to global travel restrictions and shutdowns, but have increased in recent months due to breakthroughs in vaccines for COVID-19.
Recent data has shown signs of continued economic recovery. The number of Americans filing new unemployment benefits fell to a four-month low last week, while US consumer sentiment improved to its highest level in a year in early March.
The prices for have risen by 35% since the beginning of the year.
Investors are watching supply momentum as another catalyst for crude oil prices and energy stocks.
The Organization of Petroleum Exporting Countries and its allies cut production significantly over the past year as demand collapsed due to the pandemic. The group agreed earlier this month to extend most of the production cuts to April.
Any efforts by President Joe Biden’s administration to regulate U.S. drilling could prop up prices by keeping supply in check, investors said. “It is more likely that there is an aggressive regulatory regime in place that is restricting supply, which has a positive impact on commodity prices,” said Burns McKinney, portfolio manager at NFJ Investment Group.
Investors said they want to see if companies could spend on new wells that could oversupply the market and ultimately weigh on prices, or reduce debt and bolster dividends.
Jason Gabelman, Cowen’s senior energy equity research analyst, said five international oil companies cut capital expenditures by an average of about 20% to $ 80 billion last year. Overall, they are expected to generally maintain spending levels in 2021. Energy companies “need to maintain their discipline, stick to limited capital budgets and not drill as much and give investors confidence that this will not be a short-lived cycle,” said Christian Ledoux, director of investment research at CAPTRUST.
Setbacks in fighting the virus could undermine the reopening of trade and associated energy shares. One such scenario could play out in Europe, where a more contagious variant of the coronavirus has pushed Italy and France to issue new bans.
Another factor is how quickly travel could recover to pre-pandemic levels.
“You might see a reopening and people will drive more and spend more on trading, but … as people travel less globally, it will result in oil demand not fully recovering,” said Gabelman .