With energy stocks the only green sector in yesterday's broad market rout as war in Ukraine dominates markets...
.... on a historic basis the group still has a long way to go before catching up with the broader market, which has benefited from outsized gains in tech according to Bloomberg's Felice Marantz who notes that since 1990, tech stocks have well outpaced any other sector, followed by consumer discretionary stocks and then health care.
The energy index, on the other hand, has significantly lagged the broader S&P 500.
But the base case for investing in long-shunned oil companies may be shifting: oil just had its biggest daily swing ever, surging to ~$140 before retreating, after the U.S. said it was considering a ban on Russian crude imports. Meanwhile, confirming the emerging global supply shock Shell is now limiting sales of heating oil to some wholesalers in Germany, in a bid to ensure it can continue to meet contractual obligations.
The only potential silver lining for an immediate boost in supply - talks with Iran - have been ridden by tensions, while meetings with Venezuelan officials are likely to take a long time to result in change, and a significant shift to green energy seems distant
Morgan Stanley analysts agree, noting that US oil & gas stocks are trading at a steep discount to oil futures and have a lot of catching up to do, estimating that the sector is currently pricing WTI at $64 a barrel.
The analysts add that as WTI oil soars above $125 and stays there, it creates further room for catchup for the likes of Exxon and Chevron. They conclude that if prices hold above $100/bbl in 2022, there is 35% potential upside to consensus Ebitda estimates for exploration & production firms.
In a separate note from Morgan Stanley's chief equity strategist Martijn Rats, he writes that he has argued for several months that oil prices need to rise to the level where demand destruction kicks in, which is arguably what oil prices are currently searching for. He then notes that given the elevated level of price volatility, in the event of meaningful disruptions to the flow of oil, large price spikes above $150/bbl are possible. As an indication, the highest oil price ever recorded occurred in 2008 at $147/bbl. Inflation adjusted, that would be approximately $182/bbl today.
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