An energy renaissance as post Covid-19 world gets priced in

An energy renaissance as post Covid-19 world gets priced in by Michael McKenna
Energy stocks continue to outperform the global equity market as investors are pricing in a post Covid-19 world with higher demand for oil driven by workers coming back to offices and people begin travelling again.

The global energy sector was up 5% relative to the global equity market yesterday driven by a combination of factors from a new Covid-19 vaccine from AstraZeneca, better than expected November PMI figures in the US, and the rumour that former Fed Chair Janet Yellen is Biden’s pick for a new US Treasury Secretary. Since the market got the first Covid-19 vaccine news from Pfizer on November 8, energy stocks have outperformed global equities by 24% underscoring investors are positioning themselves for a normalisation in 2021.

Brent crude has also moved into backwardation suggesting oil markets are normalising which could mean both higher prices and higher volume. Before we get too carried away about the outlook it is worth recognizing the fact that work-from-home and flexible work hours could still cause a more permanent reduction in oil demand, and the transition to electric vehicles will also add headwinds over the coming years. But as we have shown before in the chart below, the energy sector’s underperformance relative to the global equity market has been massive down 76% since the peak in 2008. This underperformance combined with low equity valuation could make energy stocks the best segment in global equities in 2021.

The new Covid-19 vaccine from AstraZeneca which can be stored at refrigerator temperatures for much longer than the Pfizer and Moderna mRNA vaccines, which means that distribution will be much faster and thus the market is discounting a faster path to normalisation. This is good for energy no matter what and could prove a catalyst over the coming months.

If Yellen becomes the new US Treasury Secretary then we have the potential setup for a much tighter link between fiscal and monetary policy in the US and effectively it is a move closer to the absolute loss of central bank independence. Yellen has focused her academia career on labour issues and inequality, and such her reign as treasurer could lead to more focus on full employment through fiscal measures with central banks asked to facilitate these policies. The Republicans still control the US senate, although the special senate election in Georgia in January could change that, and as such it is still uncertain whether Biden and Yellen can deliver big fiscal impulse to the US economy. But nevertheless, the market is currently betting on it and energy stocks are a natural extension of this bet. The table below shows the 20 largest energy companies available on Saxo’s trading platform.

Name Market Cap Price:D-1 P/E Total Return YTD Total Return:Y-5
CHEVRON CORP 175,234 91.03 87.24 -20.21 25.38
EXXON MOBIL CORP 166,423 39.36 -39.09 -37.88
ROYAL DUTCH SHELL PLC-A SHS 133,327 1299.00 -38.96 9.05
TOTAL SE 113,790 36.12 -20.80 5.47
PETROCHINA CO LTD-H 112,983 2.58 21.72 -29.27 -45.50
CHINA PETROLEUM & CHEMICAL-H 72,587 3.54 9.53 -17.90 -1.10
BP PLC 68,690 253.45 -41.96 -6.64
ENBRIDGE INC 60,887 39.18 16.64 -18.39 7.42
CNOOC LTD 52,873 9.18 8.48 -23.92 40.23
CHINA SHENHUA ENERGY CO-H 52,509 14.80 6.69 0.45 75.49
EQUINOR ASA 51,221 141.25 -15.69 34.41
NESTE OYJ 50,692 55.50 25.93 83.48 657.70
CONOCOPHILLIPS 45,612 42.71 -31.65 -8.92
ENTERPRISE PRODUCTS PARTNERS 43,134 19.76 9.76 -23.10 9.00
TC ENERGY CORP 41,250 57.19 13.35 -13.78 67.56
ENI SPA 35,946 8.33 -35.76 -25.50
KINDER MORGAN INC 33,097 14.62 16.36 -25.93 -23.61
SCHLUMBERGER LTD 30,082 21.61 47.36 -44.73 -66.57
EOG RESOURCES INC 29,391 50.38 23.80 -38.00 -34.96
PHILLIPS 66 28,759 65.84 73.67 -37.80 -14.48

Topics: Equities Energy (Sector) Crude Oil Oil and Gas Chevron Corp Exxonmobil Royal Dutch Shell Total