Are you looking for the opposite action? Try high energy – fossil fuels, to be specific.
A combination of supply reductions and demand increases has contributed to rising oil prices over the past two and a half months. Meanwhile, the downgrade by banks – more on that later – indicates what may prove to be a special advantage for the biggest players in the industry.
First, let’s review what happened to the merchandise. Here is a chart showing the movement of next month’s futures contracts for West Texas Crude Oil (WTI) since the end of 2013:
(FactSet)
Here is the action from the end of October:
(FactSet)
This is a 51% increase in 2 and a half months.
Investors believed in the rally. Here are the 11 sectors of the S&P 500 Index SPX,
of the largest US stocks in the first half of January, along with data for previous periods:
Covid-19 vaccines give hope that the world can return to a normal path of economic growth, perhaps later in 2021. However, the increase in winter in coronavirus cases has led the International Energy Agency to reduce its demand forecast for 2021. Then , again, the IEA report was published on Tuesday and WTI for the February delivery CLG21,
increased by 1.3% for that day.
Of course, it is easy to give up oil. The short-term path of oil and gas stocks can be rocky from here – until the pandemic seems to end. And in the very long run, the increased use of electric vehicles does not bode well for gasoline demand.
But all the electricity needed for the new electricity fleet must come from somewhere, including power plants that use fossil fuels. Oil and gas producers will continue to power heavy vehicles, planes and ships.
A new form of redlining
Redlining, the old practice of some banks to avoid lending to entire regions, is illegal. But in the world of ESG investing – which means environment, social and governance – companies are trying to make sure that investors believe they are doing everything they can to avoid environmentally harmful support activities while improving society in different ways.
This has led many large US banks, including Morgan Stanley MS,
Wells Fargo & Co. WFC,
Goldman Sachs Group Inc. GS,
JP Morgan Chase & Co. JPM,
and the most recent Bank of America Corp. BAC,
decide not to provide financial support for oil drilling activities at the Arctic National Wildlife Refuge (ANWR) in Alaska.
The Biden administration may try to reverse President Trump’s decision to drill holes in the ANWR. But that doesn’t mean big banks won’t reduce their lending to oil companies drilling in other areas.
In his January 15 daily energy report, Phil Flynn, a senior market analyst at Price Futures Group, wrote that smaller shale oil producers will bear the brunt of banks’ reluctance to lend to the industry.
“In other words, much higher Big Oil companies will become bigger and stronger, while smaller independents will break under the weight of more regulations and the inability to secure capital,” he wrote.
Favorite stocks of oil on Wall Street
So what does all this mean for investors? You have the goods – oil and natural gas – that have come under tremendous pressure. The price of crude oil is less than half of what it was not long ago. Meanwhile, US shale producers faced long-standing odds against equality last year. Looking ahead, OPEC and Russia are motivated to continue to raise prices more by managing supply.
When the pandemic finally ends, a euphoric reaction in the market could lead to an increase in oil even from current levels. Sustained economic growth could also support significantly higher prices.
Looking at the S&P 500, there are 25 energy stocks. Here are all of them, ranked by percentage of “buy” or equivalent valuations among analysts on Wall Street. The table includes consensus price targets.
The table contains a lot of data – you’ll have to scroll to see it.
In addition to the evaluation information, there are price targets for 12 months. Some of the targets are not much higher than current stock prices, even for companies with the most “purchases” or equivalent ratings. A year may not be long enough for a price target for a long-term investor, especially when watching a commodity recovery game dependent, in part, on the end of the pandemic.
Dividend yields are included in the table. Shares of Exxon Mobil Corp. XOM,
have a yield of 7.27%. The company surprised at least some investors by not reducing its dividend during the pandemic, even when oil prices were much lower. Exxon’s rival, Chevron Corp. CLC,
It also has an attractive dividend yield – 5.60% – with a much lower ratio between long-term debt and equity (right column in the chart).