The energy sector has been under a lot of pressure in the last few years. What started with a virtually-unfixable oversupply problem soon accelerated into a price catastrophe due to COVID-19. The combined effects of rampant oversupply and rapidly deteriorating demand drove the spot price for oil down 65% to trade at an 18-year low. Ultimately, the problem is, or was rather, with earnings. The outlook for earnings among the world’s oil producers fell more than 100% and was not far off the reality. The S&P 500 Energy Sector (NYSEARCA:XLE) is on track for earnings to fall more than 100% in calendar 2020 but that is where the bad news ends.
The Bull Case For Oil
Now there is a developing bull-story in the oil fields that points to a rebound in 2021. Not only is the price for oil bottoming, but the outlook for prices is positive. The EIA predicts that high-supply and COVID-restricted demand will continue in 2021 but the pressures are in decline. To start, the economic reopening is well underway and will accelerate over the next two quarters. The vaccines are largely to blame for the acceleration, as they become more widespread so to will global economic activity.
At the same time, the EIA expects usage to come in-line with production and begin chipping away at the global inventory. In terms of pricing, the spot price for Brent and WTI is expected to rise from Q4 2020 to Q1 2021 and continue edging higher over the rest of 2021. The average price for Brent is expected to average $6 per barrel more than it did in 2020 or up 14%, and this figure is up by $5 from the prior short-term EIA analysis.
What this means for the oil producers is more volume at a higher price. While the jump in demand and pricing will not offset all of the earnings declines in 2020 it will be a substantial improvement. When it comes to the stock market the number one driver of price action is the outlook for earnings. With the outlook for energy sector earnings positive and on the rise, there is no reason not to expect the Energy stocks won’t rise with it.
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