Eq: Energy

Eq: Energy (123)

Sunday, 14 July 2024 13:44

Energy Boost From Falling Rates

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Crude oil futures climbed on Thursday, buoyed by easing inflation data. The consumer price index dropped 0.1% in June, reducing the annual rate to 3%, which raised hopes for Federal Reserve interest rate cuts in September. 

 

Lower interest rates typically boost economic growth, potentially increasing oil demand. Meanwhile, mixed signals on global oil demand emerged, with the International Energy Agency forecasting slower growth compared to OPEC's more optimistic outlook. 

 

West Texas Intermediate and Brent crude both saw price increases, while natural gas prices fell. Overall, the oil future looks fairly positive with potential increased demand. 


Finsum: It is potentially shaping up to be a strong fall for energy prices if we see a rate hike.

Thursday, 04 July 2024 05:19

Natural Gas Demand Remains High

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China has firmly established itself as the third-largest gas market globally, trailing only the US and Russia, and surpassing the EU. As China’s gas demand grows, suppliers see it as increasingly significant compared to the declining European market. 

 

The EU’s dependency on foreign gas producers, with its push towards biogas and biomethane falling short, complicates its supply security. Despite EU's efforts, its domestic gas production continues to decline, increasing its reliance on imports, with spot LNG providing critical equilibrium between Asia and Europe. 

 

Europe faces high gas prices and volatility due to limited global production capacity and logistical constraints. Recent geopolitical events and sanctions, including Uniper’s termination of Russian gas contracts and the EU's 14th sanction package against Russia, further challenge Europe's gas supply dynamics.


Finsum: Natural gas will definitely see policy volatility due to the upcoming election, but for the meantime China is keeping demand high. 

Tuesday, 04 June 2024 07:53

ConocoPhillips to Acquire Marathon Oil

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M&A activity in the energy sector continues at full speed. The latest deal involves ConocoPhillips buying Marathon Oil for $22.5 billion in an all-stock deal that is expected to close in the fourth quarter. Each Marathon shareholder will receive 0.255 shares of Conoco for every share of Marathon, equating to a 15% premium to its price prior to the deal’s announcement.

Last October, ExxonMobil and Chevron completed similar acquisitions of Occidental Petroleum and Diamondback Energy for $60 billion and $53 billion, respectively. The motive for these deals is identical, as the oil majors are looking to scoop up prime North American energy-rich territory. Further, energy companies have enjoyed years of robust cash flow during the post-pandemic period, which they’ve used to pay off debt, return cash to shareholders, and make acquisitions.

According to Conoco CEO Ryan Lance, the deal will strengthen the company’s portfolio of assets and increase its supply of ‘high-quality, low-cost inventory’. He has also said that consolidation is ‘the right thing to be doing for our industry’. Since the Exxon and Chevron deals, there have been rumors of a competitive bidding process between Devon Energy and Conoco for Marathon. Previously, Conoco had lost out to Diamondback Energy as both were vying for Endeavor Energy Resources, a private producer in the Permian Basin.


 

Finsum: The M&A spree in the energy sector continues with ConocoPhillips buying Marathon Oil for $22.5 billion. 



Saturday, 25 May 2024 11:38

Opportunities Amid the Energy Transition

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The world is slowly transitioning to renewable energy. For institutional investors, this transition is likely to bring many investment opportunities. Of course, this will be a slow process that will take place over decades.  

The first step is the displacement of coal by natural gas, which is cleaner in terms of emissions and has already begun in many parts of the world, including the US. Another essential step is investing in various clean energy segments such as batteries, transmission and distribution, utilities, and renewable generation equipment. 

Many countries are recognizing energy security as a national security concern, which is also leading to supportive policies and capital flows. Countries are investing in electrification and local manufacturing in key areas like semiconductors, energy production, and storage. 

As the world moves toward net-zero emissions by 2050, companies in many parts of the economy will have to invest in decarbonization efforts. Morningstar sees opportunities for investors who understand the transition’s impact on the economy and various industries.

Capital expenditure for clean energy is expected to reach between $4 trillion and $5 trillion per year by the end of the decade. However, due to the transition taking place over a multi-decade period, investors should also have sufficient patience, anticipate volatility, and manage risk throughout the cycle. 


 

Finsum: We are in the early stages of a transition from fossil fuels to renewable energy. There will be plenty of opportunities for investors to earn healthy returns, given the size and scale of the trend.

Thursday, 09 May 2024 12:56

Will Energy Sector Strength Continue?

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Energy has been one of the best-performing sectors YTD with a 10% gain. Energy prices have moved higher due to increased geopolitical uncertainty and strong economic data. Looking ahead, LPL remains bullish on energy and recommends overweighting the sector.

It notes that valuations are quite attractive, especially with producers focusing on cash flow in recent years. In the post-pandemic period, free cash flow yields have averaged 8%, while this figure averaged 4% in the preceding decade. And producers have been using this cash to buy back shares, raise dividends, and pay off debt. 

From a technical perspective, LPL notes the relative strength as the sector has been making new, all-time highs for much of this year. Additionally, there has been strong breadth, indicating broad-based buying pressure. 

Another looming catalyst is that there has been some rotation out of the ‘Magnificent 7’ stocks into cheaper parts of the market, such as energy, financials, and small-caps. Growth stocks have led the market higher for most of the past year, but with valuations extended, there is an increased risk of a pullback or correction.

Finally, investing in energy provides some protection against inflation continuing to linger above the Fed’s desired level and rates remaining elevated as a consequence. Energy also tends to rally when long-term bonds weaken, providing a hedge for portfolios.


Finsum: Energy has outperformed to start the year. LPL remains bullish on the sector due to its attractive valuation, positive correlation with inflation, and relative strength.

Wednesday, 24 April 2024 02:00

Alternative Energy Stocks Struggling in 2024

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Alternative energy stocks have had a poor start to the year as the iShares Global Clean Energy ETF (ICLN) is down 15% YTD. A major component of the industry’s struggle is the poor performance of Tesla, which has been dealing with slowing sales and falling margins. Last week, the company announced that it would be restructuring and laying off 10% of its workforce. In the first quarter, the company had its first decline in vehicle deliveries, from 422,875 in last year’s Q1 to 386,810 this year.

Another is that overvalued parts of the market have moved lower as it’s increasingly clear that rates will remain elevated in the near term. Higher rates have a negative impact on auto sales and result in higher financing costs for green energy projects, leading to fewer installations. 

The larger story is that the transition to electric vehicles (EVs) and clean energy from fossil fuels and internal combustion engines is simply taking longer than expected.  EV demand growth seems to have stalled despite optimistic forecasts from many organizations that demand would steadily increase over the next decade. Meanwhile, the supply of EVs is set to meaningfully increase in the coming years. 


Finsum: Alternative energy stocks have been a laggard so far this year. Two of the major reasons are slowing demand for EVs and higher interest rates. 

Tuesday, 16 April 2024 04:11

Energy Stocks Outperforming

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The Energy Select SPDR ETF (XLE) is up 14% YTD, which is the second-best performance among sectors. This follows a year of underperformance in 2023 due to concerns of a recession impacting energy demand, while strong US production offsets the impacts of OPEC cuts. Last month, OPEC announced that production cuts of 2.2 million barrels per day would continue in the second quarter.

This year, oil prices have risen due to increased tensions in the Middle East. Additionally, recent economic data has clarified that the US economy is not near a recession, and there are some indications of a pick-up in economic growth. The near-term macro picture looks bullish for energy stocks given increased demand, tighter supply, and intensifying geopolitical tensions. On the supply side, OPEC has demonstrated discipline in terms of members abiding by agreed-upon production cuts, and US production is expected to not increase further.

Given valuation concerns about many parts of the market, energy stocks are also cheap, trading at 13 times expected earnings vs. 21 for the S&P 500. XLE also pays a 3% yield, which is more than double the S&P 500’s yield of 1.4%. Further, historical research shows that energy stocks have posted the best performance in high-rate environments, which is likely to persist for longer given recent economic data. 


Finsum: Energy stocks have had a strong start to 2024. Recent economic data is supportive of increased demand, while the supply side is being impacted by OPEC cuts and heightened geopolitical tensions. 

Friday, 29 March 2024 03:47

What Analysts Got Wrong About Oil

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Oil prices have continued to defy Wall Street analysts. Last year, the consensus view was that prices would weaken as the US economy slipped into a recession, with the rest of the world facing a sharper contraction in economic growth. While growth did slow, the US economy continued to expand, and global oil demand increased more than expected. In Q1, the IEA upped its forecast for US oil demand by 110,000 barrels per day due to stronger than expected economic data. 

Additionally, despite predictions from EV boosters, there has been no material impact on oil demand from increased adoption. Similarly, China’s economy has been mired in a slump, yet Chinese oil demand also defied expectations and increased more than expected. In fact, a major lesson of the post-pandemic period is the inelasticity of oil demand. 

On the supply side, US production also surpassed forecasts and made up for any production cuts from OPEC. A major factor is increasing well productivity due to newer drilling techniques. 

Looking ahead, many were skeptical that OPEC+ would remain disciplined, given individual countries’ incentives to increase revenues by boosting production. So far, the cartel has managed to successfully reduce production, which is contributing to the current tight market and a major factor in oil’s upward move YTD. 


Finsum: Last year, many analysts got it wrong when it came to oil. Overall, they were too bearish on the economy and overestimated how much a weak economy would impact oil demand. 

Tuesday, 19 March 2024 07:08

Is Money Moving from Gold into Bitcoin?

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Many have speculated that one of the catalysts for the rally in bitcoin is due to precious metals investors shifting allocations. Both assets offer protection against inflation and appeal to investors concerned about long-term monetary and economic instability. Gold and bitcoin have also enjoyed strong performances in recent months and are trading at or close to all-time highs.

However, this conjecture is not correct, according to JPMorgan. It doesn’t see outflows from gold ETFs into bitcoin ETFs. Instead, the bank notes that institutional investors, retail investors, and hedge funds have been buyers of futures of both assets since February. Since February, about $7 billion of bitcoin and $30 billion of gold futures have been bought. It also notes that both assets are extended over a short-term timeframe, leading to the risk of a pullback.

JPMorgan also believes that MicroStrategy’s recent purchase of $1 billion in bitcoin in 2024, in addition to its $1 billion purchase in Q4 of last year, has also contributed to upward pressure for bitcoin. According to the bank, this does lead to more risk in crypto as “bitcoin purchases by MicroStrategy add leverage and froth to the current crypto rally and raise the risk of more severe deleveraging in a potential downturn in the future.”


Finsum: Many believe that one of the catalysts for the rally in bitcoin is that precious metals investors are shifting allocations. However, this is not correct, according to JPMorgan. 

Friday, 15 March 2024 04:08

Gasoline Prices Expected to Rise

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Lower energy prices have provided some relief for consumers over the last few months. However, this could be changing with demand set to increase as we enter the start of driving season which is due to be exacerbated by refinery outages in many parts of the country.

 

Over the last month, gasoline prices are about 5% higher but still slightly down relative to last year at this point. Higher energy prices negatively impact consumer confidence and discretionary spending but also feed into inflationary pressures. In last month’s CPI report, higher energy prices was a major factor in the hotter than expected readings. Additionally, they have political implications given elections in November.

 

According to analysts, the situation is likely to get worse before its gets better. Gasoline inventories are lower than normal, following a 5.7 million barrels decline last week, and are now 3% below their average levels for this time of the year. Inventories could continue to be drained as refineries have been running below 87% capacity for the last 8 weeks. Adding to these issues is recent drone strikes on Russian refineries by Ukraine.


Finsum: Gasoline prices have been rising due to refinery issues. The situation is likely to get worse before it gets better as we enter summer driving season, and inventories have been drawn down more than expected. 

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