Wall Street Weekahead: Energy stocks seek next spark as investors contemplate economic recovery

NEW YORK (Reuters) – Investors betting on US energy stocks have seen a meteoric rally, as the sector leads a move towards value and economically sensitive stocks that have taken hold of the stock market. Continuing this race may depend on the success of the economic recovery, supply dynamics in the oil markets and the ability of companies to stay disciplined when it comes to spending.

The near doubling in the price of crude has helped make stocks of oil and gas companies – for years a losing bet – one of the top performing areas of the market, with outsized gains in stocks of companies such as Oil major Exxon Mobil Corp and Diamondback Energy Inc, which have jumped 89% and 231%, respectively, since early November.

With a gain of over 80% during this period, the S&P 500 energy sector returned to levels last seen in February 2020, when the stock market began its plunge amid the COVID-epidemic. 19 wreaked havoc on the economy.

“The shares are being auctioned off as demand is expected to increase,” said Michael Arone, chief investment strategist at State Street Global Advisors. “We have to see the follow-up.”

The outlook for energy stocks is central to a number of market themes, including the length of economic ‘reopening’ trade, whether energy and other value stocks can continue to rise. outperform technology and growth stocks and whether the market is prepared for potential. rising inflation.

As the benchmark S&P 500 first approaches the 4000 level, the health of the economy, the pace of inflation and a recent rise in bond yields should be hot topics when the Federal Reserve American will meet on Tuesday and Wednesday.

The abundant supply of crude that weighed on global oil prices and concerns about a push towards “green energy” were among the factors that pushed energy stocks down for most of the year. the last decade. Oil prices have fallen during the coronavirus-fueled recession amid travel restrictions and global shutdowns, but have soared higher in recent months, supported by breakthroughs in COVID-19 vaccines.

Recent data has shown signs of an economic recovery that continues to accelerate. The number of Americans filing new unemployment benefits fell to its lowest level in four months last week, while US consumer confidence improved in early March to its highest level in a year.

US crude prices are up 35% year-to-date.

Investors are viewing supply dynamics as another catalyst for crude prices and energy stocks.

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

Any effort by President Joe Biden’s administration to regulate U.S. drilling could support prices by containing supply, investors said.

“There is more likely to be an aggressive regulatory regime, which would dampen supply, which would be positive for commodity prices,” said Burns McKinney, portfolio manager at NFJ Investment Group.

Investors have said they want to see if companies are spending on new drilling, which could overload the market and possibly weigh on prices, or pay down debt and bolster dividends.

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

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

Setbacks in the fight against the virus could undermine reopening of trade and energy shares with it. Such a scenario is likely to play out in Europe, where a more contagious variant of the coronavirus has pushed Italy and France to impose new lockdowns.

Another factor is how quickly travel could rebound to pre-pandemic levels.

“You can see the reopening and people driving more and spending more on trade, but … if people travel less around the world, it will lead to demand for oil that will not fully recover to where it was,” he said. Gabelman said.