The oil industry narrowly avoided an electoral disaster. Now it’s showing signs of life



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This scenario persuades investors to cram into battered oil stocks. In Wall Street’s hit November, six of the S&P 500’s top seven stocks were in the oil industry. Western Oil (OXY) doped by a superb 73%. Devon Energy (DVN), Apache (WHAT) and Diamondback Energy (CROC) climbed more than 50% each.
the ETF Energy Select Sector SPDR (XLE) rose 28%, the second strongest month since the fund launched in 1998, according to Refinitiv, narrowly missing the record set in May.

“Christmas has come early for the oil and gas industry,” said Bob McNally, president of consulting firm Rapidan Energy Group.

“ The punches of the mother of all ”

The resurgence makes sense given that U.S. oil prices soared 27% in November, marking one of the best months in history. (The record was set last May when crude rose 88% after falling below zero the month before.)

Vaccine announcements by Pfizer (PFE) and Modern (RNAm) sparked a rush on Wall Street to buy losers from the pandemic, including small-cap stocks and cyclical sectors such as energy.

“When people want to take risks, they look to the hardest-hit industries first,” said Daryl Jones, research director at Hedgeye Risk Management. “Energy was the most washed out sector.”

As a reminder, despite the epic rally in November, the energy sector is still down almost 40% this year. ExxonMobil (XOM), America’s largest oil company, lost almost half of its value in 2020.
Exxon faces $ 20 billion hit by 'epic failure' ten years ago

The pandemic has caused an unprecedented collapse in demand for energy, with millions of Americans stranded in their homes. Energy profits plummeted, job layoffs increased and stock prices rocketed.

“For the oil industry, Covid was the mother of all punches,” McNally said.

The hope is that highly effective vaccines, once distributed, will encourage more mobility. And more people flying and driving is a prerequisite for a full recovery in the energy industry.

But the energy rally is not just about vaccines and reopening the economy.

No blue wave

Investors are also heaving a huge sigh of relief that Democrats failed to sweep the election – an outcome that seemed to be in the cards just a few months ago.

A blue wave – in addition to a pandemic – would have been disastrous for the oil industry because Democrats pledged to step up regulation to tackle the climate crisis.

“It’s not dodging a bullet,” McNally said. “He dodges a cannonball right at their head.”

The climate crisis looms on Wall Street

If Democrats had taken decisive control of the US Senate, they would have been prepared to pass sweeping climate legislation. The biggest threat to Big Oil would have been to remove tax breaks from the fossil fuel industry.

“The stars have been aligned to take a bite out of the oil and gas industry’s record. It’s gone now, ”McNally said.

Even if Democrats sweep both second-round races in Georgia next month, US Senate control will be a 50/50 draw, with Vice President-elect Kamala Harris breaking a deadlock.

Any upcoming drilling restrictions?

That’s not to say that the oil industry is completely out of Washington’s sights.

President-elect Joe Biden can sign executive orders that will make life difficult for oil companies. During the campaign, Biden has explicitly opposed a nationwide ban on hydraulic fracturing, the controversial technique of oil and gas drilling that climate activists want to stop. (Harris, during his presidential race, promoted a fracking ban.)

Biden proposed a more moderate measure: ban new oil and gas permits on public lands and waterways. But Biden wants to achieve net zero emissions by 2050 at the latest, a goal that would almost require a significant drop in fracking.

And then there is OPEC. The fall in oil prices this spring was in part due to the price war between Saudi Arabia and Russia.

Trump said the stock market would crash if Biden won.  The Dow Jones has just had its best month since 1987.
OPEC and Russia have teamed up to adopt unprecedented production cuts that have successfully revived the market. But this alliance is fragile and OPEC is struggling to decide when to start pumping more. The group was unable to reach an agreement on Monday, delaying a decision until later this week.

If OPEC cuts collapse, it will put further pressure on crude prices and oil inventories.

The rise of ESG

The big picture, the oil industry still has a huge climate problem, which cannot be solved by OPEC, vaccines or elections.

With the rise of ESG (environmental, social and corporate governance), investors are focusing on companies seen as solutions to the climate crisis (such as You’re here (TSLA) and solar companies). And they penalize those who are seen as part of the problem.

For Big Oil, that means lower valuations, higher borrowing costs, and continued pressure from shareholders to push them to decarbonize.

“Navigation is not easy,” McNally said.



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