NEW YORK (Reuters) – Investors betting on US energy stocks have seen a sharp rise as the industry leads a value movement and economically sensitive stocks that have dominated the stock market. The longer this race continues may depend on the success of the economic recovery, the dynamics of supply in the oil markets and whether companies can maintain discipline in spending.
The almost doubling of the price of crude oil has helped make the shares of oil and gas companies – for years a losing bet – one of the best performing areas in the market, with disproportionate gains in the shares of companies like the oil company Exxon Mobil Corp and Diamondback Energy Inc, which rose 89% and 231%, respectively, since the beginning of November.
With a gain of more than 80% at the time, the S&P 500 energy sector returned to the levels last seen in February 2020, when the stock market started to plummet when the COVID-19 outbreak affected the economy.
“Shares are being offered because there are expectations of greater demand,” said Michael Arone, chief investment strategist at State Street Global Advisors. “We need to see the end result.”
The prospect of energy stocks is at the heart of a number of market issues, including how long the economic “reopening” trade can last, whether energy and other value stocks can continue to outpace technology and growth stocks and whether the market is prepared for a potential increase in inflation.
With the S&P 500 benchmark approaching the 4,000 level 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 weighed on global oil prices and concerns about a push towards “green energy” were among the factors that pulled energy stocks down for most of the past decade. Oil prices have plunged in the coronavirus-fueled slowdown amid global travel restrictions and stoppages, but have skyrocketed in recent months, driven by advances in vaccines against COVID-19.
Recent data shows signs that the economic recovery continues to gain momentum. The number of Americans who filed for new unemployment insurance claims dropped to a four-month low last week, while American consumer sentiment improved in early March to its strongest point in a year.
US oil prices increased 35% year-to-date.
Investors are looking at supply dynamics as another catalyst for oil prices and energy stocks.
The Organization of Petroleum Exporting Countries and its allies last year cut production substantially due to the collapse in demand due to the pandemic. The group earlier this month agreed to extend most of the production cuts to April.
Any efforts by President Joe Biden’s government to regulate drilling in the United States could support prices by keeping supply under control, investors said.
“There is more likely to be an aggressive regulatory regime that would control 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 are spending on new drilling, which could overwhelm the market and eventually weigh on prices, or pay off debt and increase dividends.
Five major international oil companies cut their capital expenditures by an average of 20% last year, to $ 80 billion, and should, in total, maintain that level of spending in 2021, according to Jason Gabelman, senior analyst at research on Cowen’s energy stocks.
Energy companies “need to maintain their discipline, they need to stick to tight capital budgets and not drill so much and give investors confidence that this will not be a short life cycle,” said Christian Ledoux, director of investment research at CAPTRUST.
Delays in fighting the virus can undermine the reopening trade and energy stocks along with it. Such a scenario is in danger of occurring in Europe, where a more contagious variant of the coronavirus has forced Italy and France to impose new blockages.
Another factor is the speed with which travel can return to pre-pandemic levels.
“You can see the reopening and people driving more and spending more on trade, but … if people are traveling less globally, it will make demand for oil not fully recover from where it was,” said Gabelman.
Lewis Krauskopf reporting in New York; Matthew Lewis Edition