Wall St. ahead : Energy shares in growth trajectory as economy recovers

 Investors betting on U.S. energy shares have enjoyed a blistering rally, as the sector leads a move into value and economically sensitive stocks that have gripped the equity market.

How much further that run continues could hinge on the success of the economic recovery, supply dynamics in oil markets, and whether companies can stay disciplined on spending.

The near doubling in the price of crude has helped make shares of oil and gas companies – for years a losing bet – one of the best performing areas of the market, with outsized gains in the stocks of companies such as oil major Exxon Mobil Corp and Diamondback Energy Inc, which have surged 89% and 231%, respectively, since early November.

With a gain of over 80% in that time, the S&P 500 energy sector is back to levels last seen in February 2020, when the stock market began its plunge as the COVID-19 outbreak took its toll on the economy.

“Shares are being bid up because there are expectations for greater demand,” said Michael Arone, chief investment strategist for State Street Global Advisors. “We need to see the follow-through.”

The outlook for energy shares is at the center of a number of market themes, including how long the economic “reopening” trade can last, whether energy and other value stocks can continue outperforming tech and growth shares and if the market is primed for a potential rise in inflation.

Ample crude supply that weighed on global oil prices and concerns over a push toward “green energy” were among the factors pulling down energy stocks for most of the past decade.

Oil prices plummeted in the COVID fueled downturn amid global travel restrictions and shutdowns but roared higher in recent months, buoyed by breakthroughs in vaccines against COVID-19.

Recent data has shown signs of an economic recovery continuing to gain momentum. The number of Americans filing new claims for jobless benefits dropped to a four-month low last week, while U.S. consumer sentiment improved in early March to its strongest in a year.

Prices for U.S. crude are up 35% year-to-date.

Investors are watching supply dynamics as another catalyst for crude prices and energy stocks.

The Organization of the Petroleum Exporting Countries and its allies last year cut output substantially as demand collapsed due to the pandemic. The group earlier this month agreed to extend most output cuts into April.

Investors said they want to see whether companies are spending on new drilling, which could oversupply the market and eventually weigh on prices, or pay down debt and bolster dividends.

Another factor is how quickly travel might rebound to pre-pandemic levels as Europe seems to be uncertain whereas Asia is opening up.

Whatever the case may be, one cannot undermine the fact that the economy is opening and certainly the energy sector will be on a growth trajectory