While the S&P 500 is down ~four per cent with tech leading the way lower, energy is surging, up 24 per cent

By Kriti Gupta/bloomberg News

NEW YORK
EnergiesNet.com 02 10 2022

After two years of meandering, energy stocks are finally coming to life. Soaring oil prices are a big part of that — but so is the equities selloff that kicked off the year.

Market volatility the name of the game this yearThe S&P 500 Index energy index plunged in 2020 after the pandemic crushed oil demand around the world.
Last year was up-and-down, as the global economy repeatedly opened and shut with vaccines increasingly available and new COVID-19 variants emerging.

That pattern has changed since the start of 2022. While the S&P 500 is down ~four per cent with tech leading the way lower, energy is surging, up 24 per cent. The jump in oil prices is playing a role as demand increases, tensions in Russia and parts of the Middle East create geopolitical risk and investors remain concerned about limited OPEC+ supply. However the stocks are even outperforming the 19 per cent rise in West Texas Intermediate crude and Brent’s 18 per cent climb.

This is unusual. An oil rally is typically accompanied by broad gains in the stock market, as both are considered bets on growth. But the relationship is breaking down. The 40-day correlation between Brent and the S&P 500 has been fading since the start of the year as the crude benchmark climbed as high as US$94 per barrel. The same thing happened in the fall, when the correlation faded as Brent added US$22 from mid-August to the end of September in anticipation of a brutal European winter and a lack of stored resources.

Now, the story in the global economy is inflation. And the stock market has developed a sensitivity to oil prices, as the surging cost of energy drives inflation higher.

All of which is helping American energy companies. Flush with cash from record profits, many oil majors are adopting large scale stock buybacks. Exxon Mobile Corp. has promised to accelerate US$10 billion worth of share repurchases originally targeted for over the next two years. And Chevron Corp. is eyeing as much as US$5 billion in buybacks this year. Across the Atlantic, BP Plc is looking to repurchase US$1.5 billion in shares. And that’s just a fraction of Shell Plc’s US$8.5 billion buyback program.

Buybacks have historically lagged rebounds in crude, so this could be the beginning of a larger cycle fuelling energy stocks in the U.S. over the next few months. However, in light of the sector’s new capital discipline approach, the ramp up could be slower than it has been over the last 20 years.

Taken together, the American oil sector has a lot going for it. While equities remain broadly sensitive to oil prices, energy stocks are one corner of the market that may be able to capitalize surging energy prices. For investors looking to hedge inflation without directly exposing themselves to the volatility of the commodities market, this group may be worth a look — if not for the exposure to oil prices, then perhaps for the buybacks.

bloomber.com 02 09 2022