NEW YORK (Reuters) – Investors betting on US energy stocks have enjoyed a lightning rally as the sector moves into value-sensitive and economically sensitive stocks that have taken over the capital market. How far this development will continue could depend on the success of the economic recovery, the dynamics of supply in the oil markets and whether companies can remain disciplined in terms of spending.
Almost doubling the price of crude oil has helped turn the shares of oil and gas companies – a lost bet for years – into one of the best performing areas of the market, with oversized gains in shares of companies such as Exxon Mobil Corp and Diamondback Energy Inc. , which has increased by 89% and 231%, respectively, since the beginning of November.
With a gain of over 80% in that period, the S&P 500 energy sector returned to the levels last seen in February 2020, when the stock market began to decline, while the COVID-19 outbreak affected the economy.
“The shares are being auctioned because there are expectations for higher demand,” said Michael Arone, chief investment strategist for State Street Global Advisors. “We need to see the pursuit.”
The outlook for energy stocks is at the heart of several market issues, including how long economic trade can last from economic “reopening”, whether energy stocks and other values can continue to exceed technological and growth quotas, and whether the market is ready for potential growth. inflation.
As the benchmark S&P 500 approaches 4,000 for the first time, the health of the economy, the pace of inflation and a recent rise in bond yields are expected to be hot topics when the US Federal Reserve meets on Tuesday and Wednesday.
The wide supply of crude oil that has influenced global oil prices and concerns about the push for “green energy” have been among the factors that have reduced energy stocks for most of the last decade. Oil prices have plummeted in the decline fueled by coronavirus amid global travel restrictions and stoppages, but it has been screaming in recent months, backed by advances in COVID-19 vaccines.
Recent data have shown signs of an economic recovery that continues to gain momentum. The number of Americans applying for unemployment benefits fell to a four-month low last week, while US consumer sentiment improved in early March to its strongest in the past year.
Prices for US raw products have risen by 35% so far.
Investors are looking at supply dynamics as another catalyst for crude oil prices and energy stocks.
The organization of oil exporting countries and its allies last year substantially reduced production as demand collapsed due to the pandemic. Earlier this month, the group agreed to extend most production cuts in April.
Any efforts by President Joe Biden’s administration to regulate US drilling could support prices while keeping supply under control, investors said.
“There is more likely to be an aggressive regulatory regime that would restrict supply, which would be positive for commodity prices,” said Burns McKinney, portfolio manager at NFJ Investment Group.
Investors said they want to see if companies spend on new drilling, which could overburden the market and eventually weigh prices or pay debts and pay dividends.
Five major international oil companies cut their capital spending by an average of about 20 percent last year to $ 80 billion and are expected to generally maintain that level of spending in 2021, according to Jason Gabelman, senior analyst. research in the field of energy actions at Cowen.
Energy companies “need to maintain discipline, stick to tight capital budgets and not exercise as much, and give investors confidence that this will not be a short cycle,” Christian said. Ledoux, director of investment research at CAPTRUST.
Failures in the fight against the virus could reduce reopening transactions and energy shares with it. Such a scenario risks taking place in Europe, where a more contagious variant of coronavirus has pushed Italy and France to impose new blockades.
Another factor is how quickly travel could return to pre-pandemic levels.
“You may see the reopening and people driving more and spending more on trade, but … if people travel less globally, this will lead to an oil demand that will not fully return to where it is. it was, “Gabelman said.
Report by Lewis Krauskopf in New York; Edited by Matthew Lewis