NEW YORK (Reuters) – Investors betting on US energy stocks have seen a blistering rally as the industry moves towards value and economically sensitive stocks that grip the stock market. How much further that run continues could depend on the success of the economic recovery, the dynamics of oil market supplies, and whether companies can remain disciplined in their spending.
The nearly doubling of the price of crude oil has helped the stocks of oil and gas companies – a losing gamble for years – have become one of the best performing parts of the market, with excessive gains in the shares of companies such as oil company Exxon Mobil Corp and Diamondback Energy Inc, which are up 89% and 231% respectively since early November.
With gains of more than 80% during that time, the S&P 500’s energy sector is back to its February 2020 levels, when the stock market began to plummet as the COVID-19 outbreak took its toll on the economy.
“An offer is being made for equities as there are expectations for greater demand,” said Michael Arone, chief investment strategist at State Street Global Advisors. “We have to see the sequel.”
The outlook for energy stocks is central to a number of market themes, including how long economic ‘reopening’ trading can last, whether energy and other value stocks can outperform technology and growth stocks, and whether the market is poised for a potential rise of 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.
Plentiful crude oil supplies weighing on global oil prices and concerns about a push towards “green energy” have been one of the factors that have brought down energy supplies for most of the past decade. Oil prices plummeted during the coronavirus-induced downturn amid global travel restrictions and shutdowns, but have roared higher in recent months, bolstered by breakthroughs in vaccines against COVID-19.
Recent data shows signs of an economic recovery that is gaining momentum. The number of Americans filing new claims for unemployment benefits fell to a four-month low last week, while consumer confidence in the US improved to its strongest in a year in early March.
Prices for US crude oil are up 35% year-to-date.
Investors are looking to supply dynamics as another catalyst for crude oil and energy stock prices.
The Organization of Petroleum Exporting Countries and its allies cut production significantly last year when demand collapsed due to the pandemic. The group agreed earlier this month to extend most of its production cuts to April.
Any attempt by President Joe Biden’s administration to regulate US drilling could support prices by controlling supply, investors said.
“There is more chance of an aggressive regulatory regime that 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 money on new wells, which can overstock the market and ultimately drive prices down, or if they want to pay down debt and drive up dividends.
Five international oil companies cut their capital expenditures by an average of about 20% last year to $ 80 billion and are generally expected to maintain that level of spending by 2021, said Jason Gabelman, senior energy stock research analyst at Cowen.
Energy companies “need to maintain discipline, stick to limited capital budgets and not so much drilling, and give investors confidence that this will not be a short-lived cycle,” said Christian Ledoux, director of investment research. at CAPTRUST.
Setbacks in the fight against the virus could undermine the reopening of trade and energy stocks. Such a scenario threatens to play out in Europe, where a more contagious variant of the corona virus has prompted Italy and France to impose new lockdowns.
Another factor is how quickly journeys can return to pre-pandemic levels.
“You may see reopening and people driving more and spending more on trade, but… if people travel less globally, it will mean that oil demand doesn’t fully recover to where it was,” Gabelman said.
Reporting by Lewis Krauskopf in New York; Editing by Matthew Lewis