• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • TheStreet Smarts
  1. Home
  2. / Investing
  3. / Stocks

How Much Power Is Left in the Energy Stocks Rally?

Energy stocks are hot this year. Is the winter set to only get warmer?
By KEVIN CURRAN Oct 14, 2021 | 01:00 PM EDT
Stocks quotes in this article: SLB, OXY, PXD, XOP, XLE, COP, XOM

After years of underperformance, energy stocks have emerged as market leaders in 2021.

The move has been a welcome relief for long-suffering shareholders of stocks like Schlumberger (SLB) , Occidental Petroleum (OXY) , and Pioneer Natural Resources  (PXD)  , which were battered by the Covid-19-driven dip in demand for oil and gas.

Occidental is perhaps one of the starkest turns of fortune, as its ill-timed Anadarko acquisition and subsequent macroeconomic pressures caused by Covid led to its severe laggard position prior to 2021. Over the past year, the stock has notched an over 100% gain, more than quadrupling the return of the S&P 500.

For a broader look at the recent move, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) has roared to an over 80% gain since the start of the year, while its cousin, the Energy Select Sector SPDR Fund (XLE) is up nearly 50%. For natural gas, the trend is even more striking.

Yet, whenever a sector soars to such heights, one must wonder how much steam a rally has left.

Roots of the Current Rally

In many ways, the present push upward for energy stocks is a product of their very unpopularity.

In recent years, ESG investing has become one of the greatest trends in investing. Inherent in this shift is an eschewance of many energy stocks that predicate their business on fossil fuels. As such, many institutional investors have worked to drop traditional energy names from portfolios and instead pivot to clean-energy alternatives.

As a result, Sean Fieler, President and Chief Investment Officer of Equinox Partners, opined that the current crisis and eye-popping prices at the pump are self-inflicted.

"Oil is in a structural, not cyclical, bull market. Western production may never recover from years of massive underinvestment." he told Real Money. "The developed world's preference for energy alternatives is driving underinvestment in hydrocarbons production and forcing energy prices higher."

At present, investors are still playing catch-up in the sector, eagerly jumping back into a sector they so hated in years gone by. In order to contend with this catch-up trend, Fieler suggested exploration and production companies are the most promising targets for investors. Even amidst the current rally, he argued that valuations remain appealing.

Meanwhile, based upon rapid recovery in demand from the depths of Covid-19's demand curtailment, Goldman Sachs analyst Neil Mehtra likewise remains optimistic.

"While we have long held a bullish oil view, the current global oil supply-demand deficit is larger than we expected, with the recovery in global demand from the Delta impact even faster than our above consensus forecast and with global supply remaining short of our consensus forecasts," he wrote in a recent report. "Meanwhile, winter demand remains skewed to the upside with a global natural gas shortage continuing to bite."

He recommended ConocoPhillips (COP) and Exxon Mobil (XOM) as his top picks as these trends continue to play out.

Geopolitical Jolt

Inherent in the issues noted above and observed more broadly in the energy industry are political problems.

Of course, top of mind for U.S. investors is the Biden administration's long-stated goal of cutting fossil fuel reliance.

Only a week after taking the oath of office, the President signed an executive order directing the relevant agencies to "ensure that, to the extent consistent with applicable law, Federal funding is not directly subsidizing fossil fuels." It added that all fossil fuel subsidies should be eliminated from the budget from 2022 onward.

Instead of reneging on these promises, the administration has instead moved to make overtures toward OPEC, supplicating the cartel to increase exports. As of yet, the request has fallen on deaf ears.

However, the crisis moves well beyond OPEC and the U.S. alone.

For example, recent droughts in Brazil have curtailed hydropower production and sparked demand for gas. Meanwhile, China has not slowed whatsoever in its energy demand. In fact, the East Asian nation has even slated plans to build more coal-fire plants in order to deal with its energy deficit, backing away from previous commitments on climate issues.

For Europe, progress against fossil fuels has left them in a lurch much like that of the United States. That is not to mention the serious issues presented by the completion of Nord Stream 2, a pipeline that leaves Europe increasingly dependent on Russian liquefied natural gas (LNG).

While leaders across the EU bloc argue that the high prices are transient, the current crisis is likely to last at least through the duration of the winter.

"Market expectations indicate that this is a temporary situation, but gas prices will remain high throughout the winter and should gradually decrease from Spring next year based on current demand forecast," EU Commissioner for Energy Kadri Simson said in recent official remarks. "The evolution of the winter season is a key variable to watch closely. This price shock cannot be underestimated."

Clearly from her remarks, there is serious concern that prices could remain elevated for a protracted period of time. Nonetheless, she argued for increased focus on the European Green Deal as a long-term solution. In the short-term, this could spell only more elevated energy prices across Europe.

Overall, as these political and structural dramas gradually play out, there appears ample time left to play the rally in energy even if you might have missed the initial surge.

"Over the very long-run we continue to forecast lower energy prices, but as Western firms step back from new large oil and gas projects, we believe the power of OPEC will rise over the next decade as their share of global output increases," Eric Leve, CIO of San Francisco Bay Area-based asset manager Bailard Inc. told Real Money. "We should only expect secular weakness when we are much farther down the road of transitioning away from fossil fuels."

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Curran was long XLE.

TAGS: ETFs | Investing | Oil | Stocks | Energy | U.S. Equity

More from Stocks

Suddenly, a Fear of Heights on Wall Street

Helene Meisler
Aug 18, 2022 6:00 AM EDT

Sentiment anecdotally shifted on Wednesday. Let's take a look.

Fear and Anxiety on Wall Street

James "Rev Shark" DePorre
Aug 17, 2022 4:41 PM EDT

We've got fear of missing out and wariness that the market may keep running away to the upside.

Peabody Is Glowing Hot

Mark Sebastian
Aug 17, 2022 3:19 PM EDT

Here's how to play Peabody Energy as it looks like it could fire up over $25.

It's Hard to Say What's Cookin' at Weber, Though It Smells Like a Short Squeeze

Jonathan Heller
Aug 17, 2022 11:30 AM EDT

The grillmaker's stock has traded wildly and heavily at times, most recently this week after it posted its latest results on Monday.

Dour Day Shows Why I've Been Raising Cash Into Strength

James "Rev Shark" DePorre
Aug 17, 2022 10:44 AM EDT

I'm not aggressively bearish, but just waiting for better technical conditions.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 02:23 PM EDT STEPHEN GUILFOYLE

    We're Cleaning Out This Retailer From the Bullpen

    Check out the latest moves in TheStreet's Stocks U...
  • 10:24 AM EDT JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    To Improve Your Trading and Investing, Spend More ...
  • 08:44 AM EDT PETER TCHIR

    CPI Beats Expectations, But Maybe Not the 'Whisper'?

    Slightly better-than-expected inflation across the...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2022 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login