Oil and gas companies have been staring at public outrage for years and the pressure has only been growing, with a new generation of emerging investors pushing the industry to clean up their performance. And yet, it seems like there are a lot of old investors as well, the ones who go after returns and pile up with oil and gas because they provide profitability.
So far, the S&P 500 energy sector has gained 29.4%, according to Palash Ghosh for Forbes. This makes energy the best-performing sector in the S&P 500, followed by financing as the second most distant, with a gain of 17.6 percent.
The recovery in oil stocks came as a result of the improvement in oil prices, and oil prices improved, above all, in the hope that the economies would soon return to normal. Massive vaccinations in key oil markets contributed greatly to fueling this post-pandemic optimism about oil, which raised benchmarks above $ 60 a barrel and attracted investors to oil stocks.
Of course, vaccines were not the only factor. OPEC + also kept its production limited for longer than initially planned. The cartel decided at its last meeting to increase production gradually and the fact that this decision did not drop prices shows that expectations of a rise in demand are really strong right now.
OPEC + ‘s decision is remarkable: it would see how the combined output of all participants in the expanded cartel would increase by about 2 million bpd in July. This is an additional 2 million barrels of barrels reaching a market that already records higher volumes from Libya and Iran, both exempt from the OPEC production cut agreement. And demand has yet to fully recover in most of the world.
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Still, these are expectations. If OPEC + expects demand to recover soon — and is doing so, albeit with vigilance — traders will buy oil stocks in anticipation of that recovery, even if it takes longer than most expected. We already saw it at the end of last year when the first vaccines against Covid-19 were approved. Oil prices – and oil stock prices – jumped immediately and have since continued mainly upwards.
It is not uncommon, then, for analysts to advise their clients to buy oil stocks. They have their preferences (Hess Corp is one and Cheniere is another, with Baker Hughes in the third option), but the whole industry sentiment is much more positive than it was just a year ago.
All of this is happening as the pressure continues to increase on oil and gas companies to basically stop being oil and gas companies. What is proving the rise in oil stocks is, however, that many investors still prefer the return to the promises of clean energy. An early proof of this was the fall in the price of BP shares after last year CEO Bernard Looney announced perhaps the most ambitious energy transition plan among big Big Oil companies.
Other large European companies have made similar ambitious green energy commitments for which they have received some resentful praise with warnings that more needs to be done. At the same time, they have continued to do their main business, which is the production, refining and sale of petroleum and petroleum products. And this business has experienced a rebound from last year as demand began to improve and prices rose. Some oil companies are already considering restarting their stock repurchase programs, and this is a strong signal that things are looking financially.
Investing in ESG may be all the rage these days, and solar stocks may be the favorites among the ESG crowd, but oil has not yet fallen by the wayside. After perhaps the toughest year in history for the industry, oil and gas are back on their feet and are back fast.
By Irina Slav for Oilprice.com
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