Are you looking for an opposite action? Try a great energy: fossil fuels, to be specific.
A combination of supply cuts and increased demand has helped raise crude oil prices over the past 2½ months. Meanwhile, the reduction of banks (more on this later) points to what may prove to be a special advantage for the main players in the industry.
First, let’s review what happened to the merchandise. The following is a graph showing the movement of month-to-term continuous futures contracts for West Texas Crude Oil (WTI) since late 2013:
(Data set)
Here is the action from the end of October:
(Data set)
This represents a jump of 51% in two and a half months.
Investors have believed in concentration. The following explains how the 11 sectors of the S&P 500 SPX index,
of the largest US stocks in the first fortnight of January, along with data from previous periods:
Covid-19 vaccines give hope that the world can return to a normal path of economic growth, perhaps later in 2021. However, the winter rise in coronavirus cases has led the International Energy Agency to reduce its demand forecast for 2021. Then the IEA report was published on Tuesday and WTI for the February delivery CLG21,
increased 1.3% during the day.
Of course, it’s easy to give up oil. The short-term path of oil and natural gas stocks may be rocky from here, until the pandemic seems to end. And in the very long run, the increase in the use of electric vehicles does not bode well for gasoline demand.
But all the electricity needed for the new power fleet must come from somewhere, including power plants that make use of fossil fuels. Oil and natural gas producers will continue to power heavy vehicles, planes and ships.
A new form of redlining
Redlining, the old practice of some banks to avoid lending to entire regions, is illegal. But in the world of ESG investment, which means environment, social and governance, companies are trying to make sure investors believe they are doing everything they can to avoid supporting activities that harm the environment while improving society in various ways.
This has led to many large US banks, including Morgan Stanley MS,
Wells Fargo & Co. WFC,
Goldman Sachs Group Inc. GS,
JP Morgan Chase & Co. JPM,
and more recently Bank of America Corp. BAC,
decided not to provide financial support for oil drilling activities at the Arctic National Wildlife Refuge (ANWR) in Alaska.
The Biden administration may try to reverse President Trump’s decision to open drills in ANWR. But that doesn’t mean big banks won’t reduce their lending to oil companies that drill in other areas.
In his January 15 daily energy report, Phil Flynn, a senior market analyst at Price Futures Group, wrote that smaller shale oil producers would bear the brunt of banks ’reluctance to lend to the industry.
“In other words, the much-mocked‘ Big Oil ’companies will become bigger and stronger, while the smaller independents will shrink under the weight of more regulations and the inability to secure capital,” he wrote.
Wall Street’s favorite oil stocks
So what does all this mean for investors? You have the commodities (oil and natural gas) that have come under tremendous pressure. The price of crude oil is less than half what it was not so long ago. Meanwhile, U.S. slate producers faced long odds of not equaling last year. Looking to the future, the OPEC nations and Russia are motivated to continue raising prices by managing supply.
When the pandemic ends, a euphoric reaction in the market could cause oil to skyrocket even from current levels. Sustained economic growth could also support significantly higher prices.
Looking at the S&P 500, there are 25 energy stocks. These are all of them, ranked by percentage of “buy” or equivalent ratings among Wall Street analysts. The table includes agreed price targets.
The table contains a lot of data: you have to scroll to see it.
In addition to valuation information, there are 12-month price targets. Some of the targets are not much higher than current stock prices, even for companies with more “buy” or equivalent ratings. A year may not be long enough for a price target for a long-term investor, especially when looking at a commodity recovery game that depends, in part, on the end of the pandemic.
Dividend yields are included in the table. Shares of Exxon Mobil Corp. XOM,
they have a yield of 7.27%. The company has surprised at least some investors by not reducing the dividend during the pandemic, even when oil prices were much lower. Exxon’s rival, Chevron Corp. CLC,
it also has an attractive dividend yield (5.60%), with a much lower long-term debt ratio than equity (the rightmost column of the chart).