NEW YORK (Reuters) – Investors betting on U.S. energy stocks have enjoyed intensive concentration as the sector leads a movement toward economically sensitive stocks and stocks that has taken over the equity market. As for the continuation of this career may depend on the success of the economic recovery, the dynamics of supply in the oil markets and whether companies can maintain discipline in spending.
The almost doubling of the price of crude oil has helped turn the shares of oil and gas companies – a lost bet for years – into one of the best-performing areas of the market, with disproportionate gains in the shares of companies such as oil company Exxon Mobil Corp. and Diamondback Energy Inc., which has risen 89% and 231%, respectively, since early November.
With a gain of more than 80% in this time, the S&P 500 energy sector returns to the levels last seen in February 2020, when the stock market began to fall when the COVID-19 outbreak took its toll on the ‘economy.
“Stocks are being offered because there are expectations of higher demand,” said Michael Arone, chief investment strategist at State Street Global Advisors. “We need to see the follow-up.”
The prospects for energy stocks are at the heart of a number of market issues, including how long “reopening” economic trade can last, whether energy stocks and other stocks can continue to outpace technology and growth stocks, and whether the market is poised for a potential rise in inflation.
With the benchmark S&P 500 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 Reserve meets. US Federal Tuesday and Wednesday.
The ample supply of crude oil that affected world oil prices and concerns about the push for “green energy” were one of the factors that reduced energy stocks for most of the past decade. Oil prices fell in the coronavirus-induced recession amid global travel restrictions and stoppages, but have risen in recent months, driven by advances in COVID-19 vaccines.
Recent data have shown signs that economic recovery continues to gain momentum. The number of Americans filing new claims for unemployment benefits fell to a four-month low last week, while U.S. consumer sentiment improved in early March to the strongest point of a year.
US crude oil prices have risen 35% to date.
Investors see supply dynamics as another catalyst for crude oil prices and energy stocks.
The Organization of the Petroleum Exporting Countries and its allies last year substantially reduced production as demand fell due to the pandemic. Earlier this month, the group agreed to extend most of the production cuts in April.
Any effort by President Joe Biden’s administration to regulate U.S. drilling could support prices by keeping supply under control, investors said.
“There is more likely to be an aggressive regulatory regime, which would slow 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 spend on new drillings, which could exceed the market and eventually weigh on prices, or pay off debt and boost dividends.
Five major international oil companies cut their capital spending by an average of about 20 percent last year to $ 80 billion and are expected to maintain that level of spending in 2021 together, according to analyst Jason Gabelman. senior in Cowen energy equity research.
Energy companies “need to maintain their discipline, they need to stay within limited capital budgets and not go so deep and give investors confidence that it will not be a short cycle,” said Christian Ledoux, director of investment research and CAPTRUST.
Disadvantages in the fight against the virus could decrease the reopening of commercial and energy actions. This scenario risks being played out in Europe, where a more contagious variant of the coronavirus has pushed Italy and France to impose new blockades.
Another factor is the speed with which travel can rise to pre-pandemic levels.
“You may see the reopening and people drive more and spend more on trade, but … if people travel less globally, that will cause oil demand not to fully recover where it was,” Gabelman said. .
Report by Lewis Krauskopf in New York; Edited by Matthew Lewis