Oil and gas stocks, the top performing equities in the S&P 500 index so far this year, have further room to rise as both retail and portfolio investors look to boost their exposure to traditional energy, expecting a worsening of the energy crisis and shortages of fuel this winter. Despite the market anxiety that soaring energy prices will continue to increase their upward pressure on inflation and central banks will continue to try to tackle said inflation with continuous large interest rate hikes, the energy space looks attractive to investors right now as Europe scrambles for energy supply.
Investors Look To Boost Exposure To Energy Stocks
Equity strategists, portfolio managers, and retail investors have grown increasingly bullish on energy stocks, the latest Bloomberg MLIV Pulse survey carried out last week shows.
The poll of 814 respondents—including retail and portfolio investors, risk managers, buy-side and sell-side traders, equity strategists, and economists—showed that two-thirds of all respondents intended to increase their exposure to energy-related stocks and bonds over the next six months.
In addition, nearly three-quarters—or 74%—of respondents see soaring electricity and natural gas prices as the commodities driving global inflation the most this year, especially if Russia further disrupts pipeline gas supply to Europe this autumn and winter.
“I definitely want to remain invested in energy stocks because of massive supply constraints,” Chris Wood, global head of equity strategy at Jefferies, told Bloomberg TV in an interview.
Energy Supply Constraints
Despite falling oil prices over the past few weeks due to recession fears, supply out of Russia could be squeezed in December when the EU ban on Russian seaborne oil imports kicks in, resulting in a tighter market despite potentially slowing demand growth. The G7-spearheaded price cap on Russian oil, and a possible cap on Russian gas prices in the EU, could further complicate energy supply to the most developed economies in the world if Putin follows through with his threat to stop supplying all energy products to Europe if the EU and its Western allies imposed price caps on Russian oil and natural gas. Related: OPEC Remains Below Production Target Despite Boosting Output Again
A shortage of critical fuels such as natural gas and diesel could boost the stocks and bonds of energy companies as they have the ability to invest in more oil and gas supply.
Years of underinvestment in the oil and gas sector has come back to haunt global energy supply, according to Jeff Currie, Global Head of Commodities Research at Goldman Sachs, which has been bullish on oil all year.
“The only way you’re solving the energy problem in the long run is through investment – and oil companies are the conduit for the capex to solve the problem,” Currie has told Bloomberg.
In natural gas, the Russian cut-off of all supply via Nord Stream to Germany makes a bullish case for energy companies producing and/or trading and selling LNG on the spot market, including supermajors such as Shell, TotalEnergies, or BP.
Respondents in the Bloomberg MLIV Pulse survey expect natural gas to be the most constrained commodity in the short term. Most of those also believe that OPEC+ will not let oil prices fall too low and would intervene with a production cut on the market if a recession saps oil demand.
Moreover, nearly half—or 44%—of respondents say the current price of oil doesn’t adequately reflect actual supply and demand.
Saudi Arabia’s Energy Minister, Prince Abdulaziz bin Salman, last month pointed to the “disconnect” between paper and physical markets, saying that OPEC+ was ready to cut production at any time in any form if it believes it would bring stability to the “schizophrenic” oil market.
Energy: Top Performer And Outlier In Falling Equity Market
The expected energy supply constraints this winter aren’t the only factors in attracting more investors in oil and gas stocks and bonds. Despite the fact that it has significantly outperformed the S&P 500 this year, the energy sector has further room to rise. Energy stocks are still much cheaper than other sectors based on forward-year price-to-earnings (P/E) ratios, analysts say.
Year to date, the energy sector has been the top performing sector in the S&P 500 index, according to market data compiled by Yardeni Research.
The energy sector in the S&P 500 had gained 47.4 percent year to date to September 12. In comparison, S&P 500 is down 13.8 percent, and all other sectors except for utilities have also lost ground since January.
Within the energy sector, the integrated oil and gas subsector has surged by 53.7 percent, and the oil and gas exploration & production subsector has jumped by 52.4 percent amid tight supply, soaring commodity prices, and expected energy shortages and rationing in Europe this winter.
Even some ESG-focused funds are not immediately casting aside oil and gas stocks, as years of underinvestment in new supply, the energy crisis, and the Russian invasion of Ukraine have thrown into sharp relief energy security and affordability. Recent analyses have suggested that some ESG funds now include traditional energy stocks in their portfolios—an unimaginable thing just two years ago.
By Tsvetana Paraskova for Oilprice.com
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