Energy stocks emerged this month on Friday (20th), beating many other stocks in the market. MarketWatch columnist Michael Brush points out seven reasons why energy stocks will rise 60% in a year.
Pfizer started to release positive vaccine news on the 9th of this month. As of Wednesday's closing, SPDR S&P oil and gas mining and production ETF-XOP rose 29.6%, S&P 500 index only rose 2%, while Dow Jones rose 4%. In contrast, the technology-based index rose much smaller, only 0.18%.
MarketWatch columnist Michael Brush believes that in the short term, the lockdown of the new crown epidemic may threaten economic growth and stifle bullish investor sentiment. Energy stocks may be sold in the short term, but in the long term, there are seven major reasons for energy stocks to rise 60% in a year.
Michael Brush explained, First: Energy stocks are cyclical, and it is expected that vaccines and stimulus policies will take a two-pronged approach next summer, and the economy will experience abnormally strong growth, and cyclical stocks will perform better by then.
Second: Energy stocks still have a lot of room for growth. Guinness Atkinson Energy Fund Manager Jonathan Waghorn pointed out that oil prices are expected to rebound with the economy next year, driving the sharp drop in energy stocks this year, with an increase of 60%.
Third: International flights resume one after another. As vaccines and herd immunity alleviates virus concerns, people will be flying again (and driving far) to restore demand for fuel, said Jonathan Waghorn, energy fund manager at Guinness Atkinson. This will drive up energy prices.
Fourth: Energy stocks are currently very cheap. Waghorn said the energy stock price-to-net-value ratio (P/B) is below 1, the lowest in 70 years relative to the S&P 500. Devin McDermott, an energy analyst at Morgan Stanley, said that we continue to see that the overall valuation of energy stocks is quite attractive.
Fifth: Market funds have not yet surged. Although oil demand and prices have greatly affected the successful implementation of the vaccine, the capital market does not seem to have returned yet, said Brian Singer, an energy analyst at Goldman Sachs.
No. 6: Supply may not rebound rapidly. OPEC Russia has been strictly controlling crude oil supply to support oil prices. Waghorn believes this will continue, and these countries will allow prices to rise to a level that is enough to reap some benefits, but not enough to stimulate U.S. shale oil producers to go online, and now the action is more conservative.
Morgan Stanley analyst Devin McDermott said that after spending more than cash flow in the past five years, U.S. producers plan to control capital expenditures to around 70%-80% of cash flow, which will limit annual production growth rate between 5%-10% to avoid liquidity tensions. The same is true for incentives to increase production, as many U.S. producers have hedged the gains from rising oil prices next year and predicted that U.S. production will not return to pre-COVID levels.
No. 7: There are even bigger problems in long-term supply, because insufficient investment will increase supply restrictions in the next few years. Larry McDonald, a financial expert, said that during the recession, energy companies have significantly reduced their investment in new oil wells, which will take two years or more to be put into operation. The market is clear to producers that if they spend their money on long-term projects, they will be hit by profitability in the short term.
