Energy Stocks Have Beaten All Other Sectors So Far This Year, But Analysts Divided Over Near-Term Outlook

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After enduring heavy losses in pandemic-scarred 2020, energy stocks have soared in value thus far in 2021, buoyed by hopes for a global economic recovery and revived demand amid vaccination rollouts and huge stimulus programs in the U.S.

Key Facts

Through Tuesday, the S&P 500 energy sector has surged 29.4% year to date, easily beating the 8.5% return of the broader S&P 500 composite index.

Some individual energy stocks – including Marathon Oil and Occidental Petroleum – have surged by more than 45% year to date.

The next best performing S&P sector after energy, financials, has gained 17.6% year-to-date.

Tony Zabiegala, COO at Strategic Wealth Partners, a financial advisory firm based in Independence, Ohio, told Forbes that the “easy money has been made in oil stocks at this point.”

As such, Zabiegala is currently bullish on selected energy stocks like oil and gas explorer Continental Resources (which Moody’s recently praised for its “significant free cash flow generation”) and natural gas producer Cheniere Energy (which Zabiegala said enjoys “high cash flow visibility”).

Phil Blancato, CEO of Ladenburg Thalmann Asset Management, told Forbes he is presently bullish on Hess Midstream, which has lagged behind the broader energy sector in terms of price performance, but which boasts a “rising dividend yield” which gives him “great optimism.”

Big Number

37.3%. That’s how much the S&P 500 energy sector plunged last year as the Covid pandemic sapped global oil demand and at one point pushed the price of crude into negative territory for the first time.

Key Background

Energy stocks have been strengthened by a confluence of favorable factors, including expectations of a global economic recovery and business reopening that will boost oil demand, and optimism over a rapid vaccination rollout in the developed countries and passage of President Biden’s $1.9 trillion stimulus bill. Since mid-February, the price of West Texas Intermediate crude has held steady at about $60 per barrel (after staying at the $40 level for most of the second half of last year). The price of oil has also been supported by OPEC output cuts earlier this year and continued strong demand from the world’s second largest oil consumer, China. Moreover, as the U.S. economy reopens, Zabiegala noted, more money will be spent on airlines, cruise lines and regional vacations, etc. – all these activities will increase consumption of oil.

What To Watch For

Earlier in April, OPEC and its allies pledged to increase oil production over the next three months on the basis that a gradual global economic recovery will support rising demand. The International Energy Agency said in a recent forecast that global oil demand is expected to grow by 5.5 million barrels per day (mb/d) to 96.5 million bpd in 2021. Zabiegala said he thinks oil is “fairly valued” right now and he does not expect prices to rise above the $60-$65 range this year. “Current oil prices are at pre-Covid levels right now, but our economy is not [yet] consuming oil at pre-Covid levels,” he said.  

Chief Critic

But Ross Gerber, president of Gerber Kawasaki Wealth and Investment Management of Santa Monica, Calif., is bearish on oil and traditional energy stocks. “The fundamental case for oil is over with the advent of green energy… throughout the world,” he said. “The rally in oil stocks is temporary. Large debts and future write-downs of assets loom over the energy giants. Other than another Middle East war, which is always possible, oil is destined for $40 a barrel or lower.” Instead, Gerber is bullish on green energy stocks like renewable energy firm Nextera.

Further Reading

Texas Freeze Sends Oil Higher, But Where Do Prices Go From Here? Experts Say “Up” (Forbes)

Oil Prices: Brent And Crude Log Their Longest-Winning Rally, What Is Next? (Forbes)

Here’s What Negative Oil Prices Really Mean (Forbes)

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