Are you looking for a contrarian action game? Try the big energies – fossil fuels, to be precise.
A combination of reductions in supply and increases in demand has helped crude oil prices soar over the past two and a half months. Meanwhile, the redlining by the banks – more on that later – indicates what could prove to be of particular benefit to the biggest players in the industry.
First, let’s take a look at what happened with the product. Here is a chart showing the evolution of West Texas Continuous Crude Oil (WTI) futures contracts since the end of 2013:
Here is the action since the end of October:
That’s a 51% jump in two and a half months.
Investors believed in the rally. Here is how the 11 sectors of the S&P 500 SPX index,
of the largest US stocks made in the first half of January, as well as data for previous periods:
Vaccines against Covid-19 give hope that the world can return to a normal economic growth trajectory, possibly later in 2021. However, the winter peak in coronavirus cases has led the International Energy Agency to reduce its demand forecast for 2021. Again, the IEA report was released on Tuesday, and the WTI for February delivery CLG1
was up 1.3% for the day.
Of course, it’s easy to give up oil. The short-term trajectory for oil and natural gas inventories can be difficult from here – until the pandemic appears to be over. And in the very long term, the increased use of electric vehicles does not bode well for gasoline demand.
But all the electricity needed for the new electric fleet has to come from somewhere, including from power plants that use 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 investing – which stands for environmental, social, and governance – companies try 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 many major US banks, including Morgan Stanley MS,
Wells Fargo & Co. WFC,
Goldman Sachs Group Inc. SG,
JP Morgan Chase & Co. JPM,
and more recently Bank of America Corp. BAC,
to decide not to financially support the activities of oil drillers in the Arctic National Wildlife Refuge (ANWR) in Alaska.
The Biden administration could try to overturn President Trump’s decision to open the drilling in the ANWR. But that doesn’t mean the big banks won’t cut back on lending to oil companies that are drilling in other areas.
In his January 15 daily energy report, Phil Flynn, senior market analyst at Price Futures Group, wrote that small shale oil producers would bear the brunt of banks’ reluctance to lend to the industry.
“In other words, the ridiculed ‘Big Oil’ will grow bigger and stronger as small independent companies crumble under the weight of more regulations and the inability to raise capital,” he said. he wrote.
Wall Street’s Favorite Oil Stocks
So what does all of this mean for investors? You have the commodities – oil and natural gas – that are under tremendous pressure. The price of crude oil is less than half of what it was not that long ago. Meanwhile, US shale producers faced a great chance of failing to break even last year. Looking ahead, OPEC countries and Russia are motivated to keep pushing up prices by managing supply.
When the pandemic finally ends, a euphoric backlash 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. Here are all of them, ranked by percentage of “buy” or equivalent ratings among Wall Street analysts. The table includes consensus price targets.
The table has a lot of data – you’ll have to scroll down to see it.
In addition to the odds information, there are 12 month price targets. Some of the targets are not much higher than current stock prices, even for companies with the highest “buy” or equivalent ratings. One 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. Exxon Mobil Corp. shares XOM,
have a yield of 7.27%. The company surprised at least some investors by not cutting its dividend during the pandemic, even when oil prices were much lower. Exxon’s rival, Chevron Corp. CLC,
Also sports an attractive dividend yield – 5.60% – with a much lower long-term debt-to-equity ratio (the far right column on the chart).