Oil and gas companies have been in the crosshairs of public outrage for years now and the pressure has only been growing, with a new emerging breed of investors pressuring the industry into cleaning up its act. And yet, there seems to be plenty of the old sort of investors, too, the ones who go after returns and pile into oil and gas because they provide returns.
In the year to date, the energy sector on the S&P 500 has gained 29.4 percent, Palash Ghosh reported for Forbes. This makes energy the best-performing sector on the S&P 500, followed by finance as a distant second, with a gain of 17.6 percent.
The rally in oil stocks came on the back of improving oil prices, and oil prices improved on the back of, mostly, hopes that economies will soon begin returning to normal. Mass vaccinations in key oil markets did a lot to fuel this post-pandemic optimism about oil, pushing benchmarks above $60 a barrel and drawing investors to oil stocks.
Vaccines were, of course, not the only factor. OPEC+ also kept its production limited for longer than it had initially planned. The cartel decided at its last meeting to raise production gradually and the fact that this decision did not send prices plunging shows that expectations of a demand rebound are really strong right now.
The OPEC+ decision is notable: it would see the combined production of all participants in the extended cartel rise by some 2 million bpd by July. This is 2 million bpd additional barrels coming into a market that is already seeing higher volumes from Libya and Iran, both exempt from the OPEC production cut agreement. And demand is yet to recover fully in most of the world.
It’s all about expectations, however. If OPEC+ expects demand to recover soon—and it does, although guardedly—then traders will buy oil stocks in anticipation of this recovery, even if it takes longer than most had hoped. We already saw this late last year when the first vaccines against Covid-19 were approved. Oil prices—and oil stock prices—immediately jumped and have since kept going mostly in an upward direction.
No wonder, then, that analysts are advising their clients to buy oil stocks. They have their preferences—Hess Corp is one and Cheniere is another, with Baker Hughes a third pick—but the sentiment on the whole industry is much more positive than it was just a year ago.
All this is happening as pressure continues to mount on oil and gas companies to basically stop being oil and gas companies. What the surge in oil stocks is demonstrating, however, is that a lot of investors still prefer returns to clean energy promises. One early proof of this was BP’s share price drop after CEO Bernard Looney last year announced perhaps the most ambitious energy transition plan among Big Oil majors.
Other European majors have made similarly ambitious green energy commitments for which they have received some grudging praise with warnings that more needs to be done. At the same time, they have continued doing their core business, which is producing, refining, and selling oil and oil products. And this business has enjoyed a rebound from last year as demand began improving and prices rose. Some oil companies are already considering restarting their share buyback programs, and this is a strong signal that things are looking up financially.
ESG investing may be all the rage these days, and solar stocks may be favorites among the ESG crowd, but oil hasn’t fallen out of grace yet. After perhaps the toughest year in history for the industry, oil and gas is getting back on its feet, and it getting back fast.
By Irina Slav for Oilprice.com
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