Are you looking for a counter action? Experience great energies – fossil fuels, to be more specific.
A combination of supply cuts and increased demand has helped crude oil prices soar in the past 2 ½ months. Meanwhile, the banks’ red line – more on that later – points to what may prove to be a special advantage for the biggest players in the sector.
First, let’s review what is happening with the commodity. Here is a chart showing the movement of the month’s continuous futures contracts for West Texas crude oil (WTI) since late 2013:
(FactSet)
Here’s the action since late October:
(FactSet)
That’s a 51% jump in 2 and a half months.
Investors believed in the rise. See how the 11 sectors of the S&P 500 Index SPX,
of the largest US stocks held during the first half of January, along with data from previous periods:
Covid-19 vaccines give hope that the world can return to a normal economic growth path, perhaps later in 2021. However, the winter peak in coronavirus cases has prompted the International Energy Agency to cut its demand forecast for 2021. Once again, the IEA report was published on Tuesday, and WTI for delivery in February CLG21,
rose 1.3% on the day.
Of course, it is easy to give up on oil. The short-term path to oil and natural gas stocks can be difficult from here – until the pandemic appears to be ending. And in the very long term, the increase in the use of electric vehicles does not bode well for the demand for gasoline.
But all the electricity needed for the new electric fleet must come from somewhere, including plants that use fossil fuels. Oil and natural gas producers will continue to supply heavy vehicles, aircraft 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 investments – which means environment, social and governance – companies are trying to make investors believe they are doing everything they can to avoid supporting activities that harm the environment, while improving society in many ways.
This led to many major US banks, including Morgan Stanley MS,
Wells Fargo & Co. WFC,
Goldman Sachs Group Inc. GS,
JP Morgan Chase & Co. JPM,
and most recently 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 government may try to reverse President Trump’s decision to open drilling at ANWR. But that does not mean that the big banks will not reduce their loans to oil companies that drill in other areas.
In their daily energy report on January 15, Phil Flynn, a senior market analyst at the Price Futures Group, wrote that smaller shale oil producers would bear the brunt of banks’ reluctance to lend to the industry.
“In other words, the so ridiculed ‘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.
Wall Street’s favorite oil stocks
So, what does all this mean for investors? You have commodities – oil and natural gas – that are under enormous pressure. The price of crude oil is less than half what it was not long ago. In the meantime, U.S. shale producers faced great chances of failing to break even last year. Looking ahead, OPEC countries and Russia are motivated to continue to push higher prices by managing supply.
When the pandemic finally ends, a euphoric reaction in the market could cause oil to skyrocket even from current levels. Sustained economic growth can also sustain significantly higher prices.
Looking at the S&P 500, there are 25 energy stocks. Here are all of them, sorted by “buy” percentage or equivalent ratings among Wall Street analysts. The table includes consensus target prices.
The table has a lot of data – you will need to scroll to see it.
In addition to the rating information, there are 12-month target prices. Some of the goals are not much higher than current stock prices, even for companies with more “buy” ratings or equivalents. A year may not be long enough for a price target for a long-term investor, especially when looking at a commodity recovery game dependent, in part, on the end of the pandemic.
Dividend income is included in the table. Exxon Mobil Corp. shares XOM,
have a yield of 7.27%. The company surprised at least some investors by not cutting its dividends during the pandemic, even when oil prices were much lower. Chevron Corp CVX, Exxon’s rival,
it also presents an attractive dividend yield – 5.60% – with a much lower ratio of long-term debt to capital (the rightmost column of the graph).