Wall Street Weekahead: Energy stocks look for the next spark as investors watch the economy rebound

NEW YORK (Reuters) – Investors betting on US energy stocks have enjoyed a skyrocketing rally as the sector leads a move toward value and economically sensitive stocks that has gripped the stock market. How much longer that streak continues could depend on the success of the economic recovery, the dynamics of supply in the oil markets and whether companies can maintain spending discipline.

FILE PHOTO: The Wall Street sign is displayed at the New York Stock Exchange (NYSE) in the Manhattan borough of New York City, New York, USA, March 9, 2020. REUTERS / Carlo Allegri

The near doubling of the price of crude oil has helped make oil and gas company stocks, a losing bet for years, one of the best-performing areas in the market, with huge gains in stocks in companies like the major oil company. Exxon Mobil Corp and Diamondback Energy Inc, which are up 89% and 231%, respectively, since early November.

With a gain of more than 80% in that time, the S&P 500 energy sector has returned to the levels last seen in February 2020, when the stock market began to plummet as the COVID-19 outbreak took its toll on the economy.

“Stocks are rising because there are expectations of higher demand,” said Michael Arone, chief investment strategist at State Street Global Advisors. “We need to see the follow-up.”

The outlook for energy stocks is at the center of a number of market issues, including how long the economic “reopen” trade may last, whether energy and other value stocks can continue to outperform technology stocks, and growth and if the market is prepared for a potential increase in inflation.

With the benchmark S&P 500 index approaching the 4,000 level for the first time, the health of the economy, the pace of inflation, and a recent surge in bond yields are expected to be hot topics as the US Federal Reserve. Meets Tuesday and Wednesday.

The ample supply of crude that weighed on world oil prices and concerns about a push towards “green energy” were among the factors that reduced energy stocks for most of the last decade. Oil prices plummeted in the coronavirus recession amid travel restrictions and global closures, but soared further in recent months, driven by advances in COVID-19 vaccines.

Recent data has shown signs of an economic recovery that continues to gather momentum. The number of Americans filing new claims for unemployment benefits fell to a four-month low last week, while American consumer confidence improved in early March to its strongest level in a year.

US crude prices have risen 35% so far this year.

Investors are looking at supply dynamics as another catalyst for oil prices and energy stocks.

The Organization of the Petroleum Exporting Countries and its allies cut production substantially last year as demand collapsed due to the pandemic. The group earlier this month agreed to extend most of the production cuts through April.

Any effort by President Joe Biden’s administration to regulate drilling in the US could support prices by keeping supply in check, investors said.

“There is more likely an aggressive regulatory regime, which would curb 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 outpace the market and eventually affect prices, or pay off debt and bolster dividends.

Five major international oil majors cut their capital spending by about 20% on average last year to $ 80 billion and together are expected to maintain that level of spending in 2021, according to Jason Gabelman, senior analyst for energy equity research at Cowen.

Energy companies “must maintain their discipline, they must stick to capital budgets that are limited and not drill as much and give investors confidence that this will not be a short cycle,” said Christian Ledoux, director of research. investment. in CAPTRUST.

Setbacks in the fight against the virus could undermine the reopening of trading and energy stocks alongside it. Such a scenario runs the risk of developing in Europe, where a more contagious variant of the coronavirus has pushed Italy and France to impose new blockades.

Another factor is how quickly travel can recover to pre-pandemic levels.

“You may see the reopening and people drive more and spend more on trade, but … if people travel less globally, that will result in oil demand not fully picking up where it was,” he said. Gabelman.

Report by Lewis Krauskopf in New York; Edited by Matthew Lewis


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