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"How Long Will The Epic Rally In Energy Stocks Last?" by Tsvetana Paraskova at OILPRICE.COM

Tom Nolan in Oil (General)

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Tom Nolan    + 2,443

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  • Energy is leading the S&P 500, jumping by 57% YTD.
  • Out of the top ten best-performing stocks in the S&P 500 year to date, nine are energy companies
  •  Investors are now trying to predict how long the energy stocks party will last.

https://oilprice.com/Energy/Energy-General/How-Long-Will-The-Epic-Rally-In-Energy-Stocks-Last.html

2022-06-02_6x9gehrm4x.jpg

 

How Long Will The Epic Rally In Energy Stocks Last?

By Tsvetana Paraskova - Jun 02, 2022, 7:00 PM CDT
  • Energy is leading the S&P 500, jumping by 57% YTD.
  • Out of the top ten best-performing stocks in the S&P 500 year to date, nine are energy companies
  •  Investors are now trying to predict how long the energy stocks party will last.

Energy stocks are enjoying their best market performance in years. They are also enjoying the best performance on the S&P 500 this year—at least so far.  After years of poor earnings, poor market returns, and investors pulling out of oil and gas stocks, conventional energy stocks have come back with a bang. 

Oil rallied above $100 a barrel after Russia invaded Ukraine. Still, public U.S. shale firms have refrained from returning to their old spending ways of sinking all their cash flow (plus a lot of borrowed money) into drilling so much oil that it would tank oil prices. The tight oil, gas, and fuel markets have also supported higher oil and gas prices. Oil and gas producers have also seen record cash flows and earnings. The scarcity in the global energy markets, chronic underinvestment in supply over the past few years, and the significant changes in global crude trade flows following the increasingly tighter sanctions against Russia have all joined forces to support oil and gas prices and stocks. 

Fear Of Recession 

But as the Fed moved aggressively and rolled out a plan to hike interest rates to tame rampant inflation—the highest in more than 40 years—Wall Street started fretting about the rising odds of a recession, which would depress oil demand going forward. 

Investors in energy are now at a crossroads. The rally is too good to pass up, but traders fear there will be an end to these good times brought about by high gasoline prices that could soon start to destroy demand, and record-high diesel prices that could hit the economy hard? Others question the ability of the Fed to manage the proverbial “soft landing” of the U.S. economy while raising the key interest rate. 

The odds of a recession have risen, but such an outcome is not the base-case scenario of many analysts and investment banks, who say that a recession is not inevitable.  

A recession and a significant slowdown in global oil demand growth are the key downside risks for energy stocks. The ESG trend that has had investors shun traditional energy stocks could also impact investor sentiment. 

Energy Is Top-Performing S&P 500 Sector

Yet, those investors who have stuck with energy stocks have been rewarded with handsome returns over the past year. As oil demand started to recover in 2021, energy stocks began to rise from the lows in 2020. With oil soaring to above $100 per barrel, the energy sector has been on a tear this year. Year to date to May 31, the energy sector in the S&P 500 had jumped by 55.7%, compared to a 13.3% decline of the index. Energy and utilities were actually the only two sectors with gains between January and May. 

The energy sector was also the largest contributor to earnings growth for the S&P 500 for the first quarter of 2022, Factset data showed in May. Of all eleven sectors, the energy sector reported the highest annual earnings growth at 268.2%, thanks to oil prices that averaged 63% above the average price for oil in Q1 2021.

Related: OPEC Considers Extra Large Hike In Oil Production To Compensate For Russia

Out of the top ten best-performing stocks in the S&P 500 year to date, nine are energy companies, including Occidental, Marathon Oil, Coterra Energy, Valero, Halliburton, APA, Devon Energy, Hess, and Marathon Petroleum. Occidental has surged 139.1%, with much of the gain made in the past two months after Warren Buffett’s Berkshire Hathaway reported it had built a large stake of over 15% in the company. 

“I decided that it was a good place to put Berkshire’s money,” Buffett said at Berkshire Hathaway’s annual meeting in April. 

“She [Oxy CEO Vicki Hollub] says she doesn’t know the price of oil next year. Nobody does. But we decided it made sense,” Buffett added. 

Do Energy Stocks Have Room To Climb Higher?  

It’s been a pretty good year for energy shares. 

Yet, with mounting macroeconomic headwinds, investors are now trying to predict how long the energy stocks party will last before a recession or a severe downturn in oil demand growth crashes it. 

In the bullish camp, U.S. shale’s investment discipline helps support stocks as investors are pleased with the consistent restraint, which helps energy firms to earn record cash flows and boost dividends. 

“In prior cycles ... companies would be spending like drunken sailors to put new rigs in the ground and find oil,” Walter Todd, chief investment officer at Greenwood Capital, which owns oil stocks including Chevron and EOG Resources, told Reuters. 

This is no longer the case with the U.S. shale patch. 

Discipline has played a role in rallying stocks, but the highest oil prices since 2014 and multi-year low fuel inventories amid rising demand have been bigger contributors to the red-hot oil stock rally. 

“This is the first time that energy companies have had a reason to smile since roughly 2014,” Stewart Glickman, energy analyst at CFRA Research, told Marketplace last week.  

On the bearish side, an economic slowdown or a recession could stop the rally in its tracks if global oil demand suffers. But a recession is not inevitable, says Goldman Sachs, for example. 

“We believe fears of declining economic activity this year will prove overblown unless new negative shocks materialize,” Goldman Sachs economists wrote in a report on May 30. 

“We continue to forecast slower but not recessionary growth, with a trade-related rebound to +2.8% in Q2 followed by +1.6% average growth over the following four quarters,” Goldman Sachs said. 

By Tsvetana Paraskova for Oilprice.com

More Top Reads From Oilprice.com:

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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U.S. Economic Officials Says Biden Considering Oil & Tax Windfall Tax

By Charles Kennedy - Jun 02, 2022, 1:00 PM CDT

A White House economic advisor told a panel on Thursday that the Biden administration is now considering the U.S. congressional proposal that would place a windfall tax on oil and gas as prices at the pumps continue to soar, Reuters reports.

"We are very much open to any proposal that would provide relief to consumers at the pump," National Economic Council deputy director Bharat Ramamurti told a Roosevelt Institute panel, as cited by Reuters.

Ramamurti said the White House was “engaging in conversations” with Congress about a windfall tax, noting there was a “variety of interesting proposals”.   

The National Economic Council official also noted a potential impact on supply if a windfall tax were imposed, though he said he did not see this as an “insurmountable hurdle”, Reuters reported.

Ramamurti’s comments came just a day after the National Economic Council deputy director told reporters that Biden’s plan to combat inflation included lowering the budget in part by raising taxes on America’s wealthiest and the country’s big businesses. 

“What the president has done and made clear is that we are dedicated to doing everything we can to stop and push back on that Russian aggression, but it’s going to cause pain for American consumers in the short term, and gas prices are one unfortunate example,” Ramamurti told local media. 

On Thursday, the national average for a gallon of gasoline in the United States hit $4.715, up from $4.671 on Wednesday, according to AAA. Brent crude was trading at nearly $118 and WTI at $117. 

Talk of a potential windfall tax in the United States follows a move by Hungary to impose taxes on extra profits for large companies across industries, in order to subsidize consumer energy bills and defense. It also follows an announcement on May 26 that the UK would implement a windfall tax on energy first in the North Sea. 

By Charles Kennedy for Oilprice.com

Latest articles from Charles

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Tom Nolan    + 2,443

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https://www.zerohedge.com/markets/it-too-late-buy-oil-stocks

Is It Too Late To Buy Oil Stocks?

Tyler Durden's Photo
by Tyler Durden
Saturday, Jun 04, 2022 - 09:30 AM

Submitted by Kailash Concepts

We get asked this question. A lot. Investors, scorched by multiple expansion in speculative stocks, are understandably concerned about the movement of prices in oil and gas.  We believe the reason to invest in oil stocks stems from a fundamental backdrop for the sector, unlike anything we have seen in our careers.

We are going to generalize. No offense intended.  We see three primary groups of equity investors today:

  1. Index Fund Investors: since we first wrote up energy over 18 months ago, the sector’s weight in the S&P 500 has doubled to 4.8%, so this group has “decided” to put less than a nickel of every dollar into some of the cheapest, most well-run and disciplined group of capital allocators in the market (we thank them for making what we believe is a catastrophic error)

  2. Active Managers: hewing to explicit or implicit environmental mandates that have deemed the producers of energy to be “bad” – this is a very large group of a shrinking pool of active managers who are willfully omitting energy and embracing “Clean Tech” stocks that often lack fundamental merit

  3. Active Managers who deviate from what we believe are flawed index funds and seek out firms with robust fundamentals that are often shunned by the crowds. These investors favor assets that provide a significant margin of safety based on a view that “risk” is defined as the permanent impairment of capital.

Fortunately, that third group has never been smaller from what we can tell.   The capital discipline, commitment to healthy balance sheets, and exploding free cash flow that characterizes oil and gas stocks seem to count for little.  This indexing age has created market inefficiencies so large and so slow to resolve themselves that it is almost hard to believe.

Figure 1 suggests this is the early innings for energy. Oversimplified? Yes. Compelling? Yes. Complicated? No.

Energy-Stocks-Are-Still-At-Record-Cheapn

When to Buy Oil Stocks

Nobody at KCR relishes the pain high energy prices are inflicting on the world. And we certainly do not write this piece with any illusions that things cannot go wrong for oil and energy stocks. Here are some examples:

  • An outbreak of a nasty new Covid strain

  • Persistent inflation

  • Sudden deflation

  • A central banker induced recession

  • Something we have yet to contemplate [our money is on this one if something should go wrong]

We think many oil stocks’ valuations already factor in lower commodity prices despite structural supply shortages. Considering the hostile financial (ESG), regulatory and political backdrop (discussed below) do you believe any material supply is coming online? Possibly of more importance: if any of the above scenarios hit energy prices, won’t bloated growth stocks trading at 50x earnings and speculative loss-making stocks get hit much harder?

Our team believes the disparity between the change in the commodity prices vs. the stocks is a compelling sign of just how little credit investors are giving the energy sector. The chart below does the following:

  • Takes the 3-year change in natural gas prices minus the 3-year change in the price of energy stocks[i]

  • When the line is above zero, it tells us that natural gas has gone up much faster than energy stocks

  • When the line is below zero, it tells us that the stock prices have gone up much faster than the gas prices

Over the last three years, natural gas prices are up 232%, while the Energy Sector’s stock prices have only risen 52%. Said differently, natural gas prices have risen 180% more than energy stocks since April 2019. The last time the commodity ran this far ahead of the stocks was in November of 2000. That date would prove to be the start of a seven-year bull market for energy stocks, which would destroy the S&P500.

In the dot.com bubble, investors went crazy for novel tech stocks. Energy stocks, which make the basic input for modern life, were deemed obsolete. That lack of investment led to a serious supply shortage. The cycle repeats today.

Fig. 2: Percent Change in Natural Gas - Percent Change in Energy Stocks

Percent-Change-in-Natural-Gas-Percent-Ch

Today’s situation “rhymes” but strikes us as significantly more constructive for the energy sector. We do not recall AOL, Akamai, Cisco, or other internet darlings talking about how oil was obsolete. The sector was just forgotten and left behind during the dot.com mania.

In this cycle, we had promotional shills proclaiming the end of energy. The novel story stocks were, and are, often companies that suggest they solve the energy crisis despite considerable evidence to the contrary. We believe the divergence between narrative and truth has rarely been wider than it is today.

The chart below shows how investors did in prior periods when natural gas outperformed the energy sector by 100% or more (light blue line in Fig. 2). Intuitively, when the stocks do not follow the commodity, that means investors doubt the durability of physical market prices for energy. Rarely has that doubt been more pronounced than it is today. Figure 3 shows that in 3-year periods when natural gas rises 100% more than Energy stocks:

  • Energy stocks outperform the index 75% of the time by an average of 19% over the following year

  • Energy stocks underperform the index 25% of the time by an average of -9% over the following year

  • Conclusion: History suggests this is a fantastic time to buy Energy Stocks

Fig. 3: When Nat Gas Prices Rise 100% More Than Energy Stocks Over the Trailing 3 Years, Energy Typically Goes on to Trounce the Index

When-Nat-Gas-Prices-Rise-100-More-Than-E

The table below shows the fundamentals of the S&P500 vs. the KCR top 5 ranked U.S. and Canadian energy stocks today. We think the data speaks for itself. We provide the lists for the two KCR energy groups in the exhibit at the end of this piece.

fundamentals-of-the-SP500-vs.-the-KCR-to

Below, we take a moment to address some fears around energy prices and energy stocks.

Buy Oil Stocks When Others Won’t

People fret about the “sustainability” of the commodity rally. The oil market’s recent surge is deemed, by many, as being too high. Today people blame the invasion of Ukraine as the cause of what many view to be a transitory problem. We agree that current oil prices may be transitory.

Yet we believe the data suggests prices may be too low.

There is no doubt the tragedy in Ukraine has sent oil and natural gas higher. But the IEA did a remarkable job outlining the bull case for oil in early 2021, long before the war. We summarized the IEA’s bullish findings on oil shortly after its publication. To summarize our summary: they explained that halting the growth in energy use would require the wholesale change of human behavior globally.

We saw no sign of any such changes. Starstruck by celebrity CEOs and Fund Managers shilling impossible narratives, people chased story-stocks to obscene levels. Published in May of 2021, our piece on Oil Producing Assets noted that Tesla’s market cap was equivalent to all the stocks in the energy sector combined.

Faced with the choice of making difficult changes in lifestyle or getting a government subsidy to buy an electric sports car, the sports car won out. Unfortunately, investors and consumers seemed almost willfully blind to the unforgiving data around EVs. Goehring & Rozencwajg’s research was quick to highlight the brutal shortfalls, and still no one listened. Lucas White of GMO recently penned a clear and quick summary of the problems with the EV narrative.

While BEVs of dubious environmental merit were drowning in capital, the energy sector starved. Our lead-in chart in Crude Investing: Energy Stocks & ESG highlighted that capital expenditures in the energy sector hit lows last seen at the peak of the dot.com bubble. When we make an industry a pariah, starve them of capital, choose to believe storytellers over fact, and then see spending on production collapse, we should expect higher commodity prices. Let’s use recent history to put current prices in context.

The shaded area shows the range of observed natural gas prices between 2006 – 2010 by month. Revisit our chart on energy sector capital expenditures. The US was spending nearly 4x as much on energy capex as we are today. The line you see is natural gas prices so far in 2022. Does it still look expensive?

Fig. 4: Natural Gas Price Range 2006 - 2010 vs 2022 Natural Gas Prices

Natural-Gas-Price-Range-2006-2010-vs-202

For further perspective, we ask you to consider the following. Current energy prices are where they are despite coordinated releases of oil from the US and other countries’ strategic reserves working to hold prices down. The US SPR is now below 538ml barrels. The lowest level since 1987.

We think that adds a built-in “bid” to energy. If governments stop selling, prices may rise. Also, it is worth noting that the US economy is five times larger today than in 1987 and experiencing a reshoring boom. Seems unwise to have our strategic reserves back to 1987 levels. At some point, we will need to rebuild our strategic reserve. Exploration and Production: An Unfortunate Tailwind

There is a lot of noise about the conduct of the energy companies. They are accused of profiteering from the war. People clamor for windfall profit taxes.

We believe the vast majority of people in America have much more in common than the media would have us believe. With that said - the media has never been more powerful in polarizing us.

In the interest of encouraging a middle ground, let us take a quick tour of energy companies’ recent experiences.

In the Covid crash, oil prices went negative. British Petroleum’s 2020 Energy Outlook and many other major energy experts came out and declared peak demand had arrived. In one piece, we cited this article about brand new rigs with 30 year operating lives being scrapped. Famous people were calling for $12 oil based on EVs. Even today, stories come out suggesting “Peak Oil is Coming” warning about stranded oil assets.

So, which is it? Are these companies profiteering? Or are they at risk of ending up stranding investors’ assets?

Energy investing is a capital-intensive business that requires long-term thinking. In 2016, 142 oil and gas companies went bankrupt. Another 100 followed them into insolvency in 2020. So, they’ve had a good year and a half and now we want both more production at lower costs but are going to increase their costs via punitive taxes?

This is sheer madness. Energy and fertilizer shortages will grow worse. Soaring incidence of famine will merely get worse. Egged on by the most promotional CEOs and money managers we have ever seen, the world has and continues to shower capital on speculative clean tech stocks of dubious to negative value.

Regardless of your opinion, the chart below doesn’t lie. That’s the EIA’s most comprehensive measure of US natural gas production. This is an industry that shattered production records in 2021. Not bad, considering the catastrophic 2020 Covid year and the calls by many pontificators for their inevitable decline. To each their own.

Fig. 5: U.S. Natural Gas Gross Withdrawals

nat%20gas%20fig%205.jpg?itok=tTs4OAoh

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 

QUICK TAKES FOR THE CURIOUS

A monthly, wide ranging, and informal note based on discussions and readings.

https://kailashconcepts.com/quick-takes-for-the-curious/

 

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morissyn    + 2

AL

 Now the rally of almost all stocks continues. Probably the world will never be the same again.

  • Like 1

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mihamilton    0

MM

(edited)

Energy stocks will be unstable until Russia stops what is happening in Ukraine. Until then, of course, the shares of energy companies will grow. Now I am focused on trading and even use https://fbs.com/trading/mobile-personal-area to monitor the changes constantly. The trend is that prices will continue to rise, and the energy cost will soon reach its peak. That's when the decline will gradually begin, but the cost of gasoline is unlikely to return to previous indicators and will continue to grow.

Edited by mihamilton

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Tom Nolan    + 2,443

TN

(edited)

1 hour ago, morissyn said:

 Now the rally of almost all stocks continues. Probably the world will never be the same again.

I noticed that also.  As I understand it, the market is already pricing in the Fed's easing in the future following the increase in interest rates.  Pension funds will be doing some buying in July also.  That doesn't mean that we won't see stocks go further south by September (which I believe they will.)

This was a very good, sane discussion at Wealthion YouTube...

Sell Into This Week's Strength? Probably A Good Idea | Lance Roberts & Adam Taggart

https://www.youtube.com/watch?v=ol-9dUp-t4g

Edited by Tom Nolan

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Goldman Sachs: Upside Risk In Oil Is “Tremendously High”

By Charles Kennedy - Jun 27, 2022, 10:30 AM CDT

  • Goldman Sachs remains highly bullish on crude and refined products.
  • GS: recent pullback could be buying opportunity. 
  • The underinvestment thesis remains the core of Goldman's energy market view.

Goldman Sachs continues to be very bullish on energy and believes that the upside risk in crude oil and refined products “is tremendously high right now,” Jeffrey Currie, global head of commodities research at Goldman Sachs, told CNBC’s Squawk Box on Monday.

The recent pullback in oil prices could be a buying opportunity because prices are set to go higher from here this summer, according to the Wall Street bank.

“The bottom line is the situation across the energy space is incredibly bullish right now. The pullback in prices we would view as a buying opportunity,” Goldman’s Currie told CNBC today.

“At the core of our bullish view of energy is the underinvestment thesis,” Currie added.

“And that applies more today than it did two weeks, three weeks ago, because we’ve just seen exodus of money from the space…investment continues to run from the space at a time it should be coming to the space,” he said.

“Ultimately, remember, the only way of solving these problems is to increase investment, so we stick to our guns of oil prices moving into the summer up into $140 a barrel range given record-level cracks, and that’s going to be a lot more upside to product prices,” Goldman’s Currie told CNBC.

https://oilprice.com/Energy/Crude-Oil/Goldman-Sachs-Upside-Risk-In-Oil-Is-Tremendously-High.html

In addition, oil could be one of the substitutes for natural gas in Europe, which struggles with significantly reduced Russian supply via the Nord Stream pipeline, he added.   

Oil prices have slumped in recent days, with Brent tumbling below $110 a barrel at one point last week, as a growing number of analysts and economists now say that the Fed’s attempts to rein in inflation with aggressive interest rate hikes may not produce the policy makers’ goal of a “soft landing” of the U.S. economy and will actually lead to a recession within a year or a year and a half.

By Charles Kennedy for Oilprice.com

More Top Reads From Oilprice.com:

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