NEW YORK (Reuters) – Investors betting on U.S. energy stocks have enjoyed a resounding surge as the sector leads to valuable and economically sensitive stocks that have gripped the stock market. How much further this run continues may depend on the success of the economic recovery, the supply dynamics in the oil markets and whether companies can remain disciplined with spending.
The near-doubling in the price of crude oil has helped make shares in oil and gas companies – which has been a loss for years – one of the areas that performed best, with excessive gains in the shares of companies such as the oil-sized Exxon Mobil Corp and Diamondback Energy Inc, which have risen 89% and 231% respectively since the beginning of November.
With a rise of more than 80% in that time, the S&P 500 energy sector is back to the levels last seen in February 2020, when the stock market began its jump when the COVID-19 outbreak hit its economy took its toll.
“Equities are being offered because there are expectations for greater demand,” said Michael Arone, chief investment strategist at State Street Global Advisors. “We need to see the follow-up.”
The outlook for energy stocks is at the heart of a number of market themes, including how long the economic ‘reopening’ of trade could last, or whether energy and other value stocks could continue to outperform technology and growth stocks, and whether the market has a potential. rise in inflation.
As the S&P 500 approaches near the 4,000 level for the first time, the health of the economy, the rate of inflation and a recent rise in bond yields are expected to be a popular topic when the US Federal Reserve on Tuesday and Meet Wednesday.
Adequate crude supply weighing down global oil prices and concerns about a push towards ‘green energy’ have been one of the factors that have reduced the largest amount of the past decade. Oil prices have fallen in the downturn driven by the coronavirus amid global travel restrictions and shutdowns, but have been roaring higher over the past few months, due to vaccine breakthroughs against COVID-19.
Recent data shows signs of an economic recovery that is still gaining 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 to its strongest in a year in early March.
Prices for US crude oil are 35% higher than the previous year.
Investors see supply dynamics as another catalyst for crude prices and energy supplies.
The Organization of the Petroleum Exporting Countries and its allies significantly cut production last year as demand collapsed due to the pandemic. The group agreed earlier this month to extend most production cuts through April.
Investors said efforts by President Joe Biden to regulate U.S. drilling could support the price by keeping supply in check.
“There is likely to be an aggressive regulatory regime that will withhold supply, which will have a positive effect on commodity prices,” said Burns McKinney, portfolio manager at NFJ Investment Group.
Investors have said they want to see if companies are investing in new drilling, which could offer the market too much and ultimately weigh prices, or pay off debt and boost dividends.
Five international oil executives cut their capital spending by an average of about 20% to $ 80 billion last year, and are expected to typically maintain their spending level by 2021, according to Jason Gabelman, senior analyst for energy equity research at Cowen.
Energy Member companies “need to maintain their discipline, stick to limited capital budgets and not drill so much and give investors confidence that this is not going to be a short-lived cycle,” said Christian Ledoux, director of investment research. by CAPTRUST.
Setbacks in the fight against the virus could undermine the reopening of trading and energy stocks along with it. Such a scenario runs the risk of playing out in Europe, where a more contagious variant of the coronavirus has pushed Italy and France to force new locksmiths.
Another factor is how fast the journey can bounce back to pre-pandemic levels.
“You may reopen and manage more people and spend more on trade, but … if people travel less globally, it’s going to cause oil demand not to fully recover to where it was,” Gabelman said.
Reporting by Lewis Krauskopf in New York; Edited by Matthew Lewis