How to boost energy stocks as oil prices soar: UBS


  • The supply side disruptions have resulted in fuel shortages and a massive rise in crude oil prices.
  • Energy stocks have recovered and may have more potential, according to strategists at UBS and Bank of America.
  • UBS explained how to play the energy space as traditional pillars and green energy entrants fight.

The global economic recovery is running out of fuel as it picks up speed.

Energy shortages hamper what has so far been a rapid global rebound from the pandemic-induced pandemic

recession
. Supply issues have pushed oil, gas and coal prices to multi-year highs and even record highs in some regions, wrote a team of UBS strategists led by Global Wealth Management CIO Mark Haefele in a September 28 note.

The disruptions in Kazakhstan, Nigeria, Mexico, Libya and the United States forced the Organization of the Petroleum Exporting Countries and its Russian Allies (OPEC +) to produce around 150,000 barrels of crude oil less per day in August than in July. This is a marked difference from the increase in supply of 400,000 barrels per day that the oil cartel had previously predicted, Haefele noted.

There followed a tightening of the offer with serious consequences. Chinese provinces suffered power outages over the weekend as 50% to 90% of gas stations in parts of the UK ran out, Haefele wrote, citing data from the Petrol Retailers Association.

As might be expected, oil shortages pushed up prices in September. West Texas Intermediate crude increased 8.8% at $ 75 during the month while Brent crude rose 7.3% to $ 78 after peaking at $ 80, which was UBS’s price target at the end of September. Demand has remained firm in recovering economies – a stark contrast to 18 months ago, when oil futures fell below zero for the first time in history as demand eased and that suppliers got stuck with junk oil.

Energy stocks have thrived on macroeconomic mismatch. The SPDR Energy Select Sector Fund (XLE), an exchange-traded fund mimicking the S&P 500 energy sector, was up 9.3% in September while the broader market fell 3.3%.

The sector remains attractive with strong upside potential ahead of the third quarter earnings season, according to UBS. Fuel supply shortages will keep oil prices high over the next few months, Haefele wrote, even if the market tightening eases by 2022 as OPEC production and exports recover.

Despite pressure from renewables, incumbent fossil fuel operators remain resilient

Mainstream energy companies have had reason to cheer lately, but the wave of green energy that is expected to displace fossil fuel incumbents has loomed over the oil industry like a thick cloud of smog. Increased awareness of the climate crisis in recent years has led to stronger calls for countries to promote renewable energy and penalize fossil fuels.

But if green energy is the future, it is not quite the present yet. The infrastructure to replace fossil fuels is not yet in place, Haefele noted, as evidenced by a recent surge in demand for coal in China. The country’s dependence on coal, which pollutes more than any other fossil fuel, has exceeded 70% as hydropower and other forms of renewable energy fail to meet the country’s needs, Haefele wrote.

China’s attempts to wean itself off heavy pollutants and meet emissions targets have led to a dramatic drop in coal production and investment. This resulted in supply shortages which pushed up prices. This should come as no surprise, Haefele wrote, adding that shortages and rising commodity prices are inevitable as the world moves towards a net zero carbon future.

“We believe that this year’s supply-side constraints may become more common, as the pressure to reduce emissions while increasing renewable energy will not happen overnight,” Haefele wrote.

This risk of under-investment in traditional energy sources was noted in January by Marko Kolanovic, head of macro, quantitative and derivatives strategy at JPMorgan.

Investors would be wise to allocate money to both traditional energy companies and their renewable energy counterparts, Haefele wrote. In the traditional energy space, Haefele emphasized industrial metals companies and large energy producers who are turning to renewable energies and have made “credible” commitments to reduce emissions to net zero.

UBS didn’t provide a specific stock pick, but four industrial metals stocks stood out this year and received a buy or overweight recommendation from most of the analysts who cover them, according to Bloomberg: Encore Wire Corporation (CABLE), up more than 64% in 2021; Luxfer Holdings (LXFR), which has increased by 27% this year; Mueller Industries (MLI), gaining 20% ​​in 2021, and Steel Dynamics (STLD), which has grown by nearly 63% since the start of the year.

Energy has “never looked so good” comparatively

Bank of America agrees that there are many opportunities in the energy industry. A team of equity and quantitative strategists led by Savita Subramanian wrote in a mid-September memo that the real

dividend yield
of 2.2% has “never looked better” than Treasury Inflation-Protected Securities (TIPS), which return -1% after inflation.

“If the [

Federal Reserve
] is determined to keep rates low despite above-trend inflation, buy what is rare: an inflation-protected return, ”Subramanian wrote.

Energy remained the top pick in BofA’s quantitative model for the third month in a row thanks to strong earnings revisions and attractive valuations. When the company has ranked very high in the past, it topped the S&P 500 by 77% on average by 11% over the next 12 months, Subramanian wrote, suggesting that the story is on the investor side. energetic.

Company optimism comes as its commodities strategists predict Brent crude will hit $ 100 per barrel by the third quarter of 2022, which suggests a 33% increase for the raw material.


Steve R. Hansen

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