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Stock Market News – Energy stocks: a short-term tactical trade or is long-term appreciation to be expected?
December 12, 2017 4:26 pmVideo
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WTI and Brent crude have recorded strong gains since roughly the completion of the first half of the year. Year-to-date, they’re up by 8.6% and 14.9% respectively, while their appreciation from the year’s lows in late June stands at 38.7% and 47.2%. Both benchmarks currently trade around 2-½-year highs. Energy stocks have been beneficiaries of this rise in oil prices during the second half of the year.
The positive performance in energy stocks throughout most of the second half of the year is evident from the following chart. The overall trend in H2 for both the Stoxx Europe 600 Oil & Gas and the S&P 500 Energy sub-indices is positive. Still, year-to-date they remain in negative territory though it is interesting to note that from the perspective of a US investor, an investment in Stoxx Europe 600 Oil & Gas would have yielded a positive return as the outperformance in the euro/dollar pair more than makes up for the decline in the sub-index (grey line in the chart below).
The question that naturally arises is: Will the energy sector, a widely out of favor one during 2017 despite the gains in recent months, remain on the rise moving forward, or does it simply present the opportunity for some short-term gains before it resumes its slide? This question could be rephrased to one where one attempts to identify whether oil prices will remain on the rise moving forward.
OPEC as well as some non-OPEC nations’ efforts to boost oil prices by virtue of supply cuts have been successful. However, a cap in prices is likely to be met soon as those producers not participating in the cuts – this includes US shale producers – will attempt to capitalize on higher prices by pumping up production levels. Oil market bulls are also putting faith on Chinese demand coming to the rescue. Despite being the case that the world’s second largest economy continues to grow at a robust pace, it is also true that there have been efforts by Chinese authorities to shift focus to the quality of growth rather than merely the quantity, with environmental considerations playing an important role. This might translate into a slowdown and thus weaker demand from China, which either way is attempting to transition its growth model away from heavier commodity-demanding industries and into the services sector, something which paints an even grimmer picture for future oil demand.
Also, the energy sector is not one of the sectors that is likely to attract funds in the expectation of tax benefits should US lawmakers manage to pass tax cut legislation into law. According to data by Standard & Poor’s, the sector’s effective tax rate is even below that of the much-talked-about tech sector, which was recently seen as losing ground as investors where moving funds out of tech and into sectors which are subject to much higher tax rates, such as financials.
Overall, it looks that gains in oil prices and consequently energy stocks are not going to be sustained, rendering positions in the sector more of a short-term tactical play, rather than a long-term investment.
The year-to-date performance of energy giants Exxon Mobil, Royal Dutch Shell, Chevron, Total and BP can be seen below (performance is in local currencies).
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