After taking a severe blow since the COVID-19 outbreak in March, large oil deposits are showing signs of life.
The Vanguard Energy Index Fund ETF (NYSE 🙂 – whose top 10 holdings are Exxon Mobil (NYSE :), Chevron (NYSE 🙂 and Phillips 66 (NYSE 🙂 – has performed tremendously over the past month. It is up about 11% compared to the reference stock index, which is up just over 1%.
This impressive streak is the result of investor optimism that the worst is over in this highly cyclical segment of the market, as successful vaccines against the COVID-19 pandemic restore expectations of full economic activity and energy demand stimulate. Products.
Pfizer (NYSE 🙂 and BioNTech (NASDAQ 🙂 announced earlier this month that their coronavirus vaccine was 90% effective in late-stage testing. Another developer, Moderna (NASDAQ :), said yesterday that the data from the phase 3 study shows that the vaccine is more than 94% effective at preventing the virus, a result that CEO Stephane Bancel called a "game changer". .
These positive developments have raised hopes among investors that economic activity will normalize in 2021. According to the International Energy Agency, advances in vaccines could significantly boost demand in the second half of 2021, after the latest wave has seen a significant slowdown. from lockdowns.
In their 2021 outlook, Morgan Stanley strategists advised investors to remain "patient" in the commodity markets.
"This global recovery is sustainable, synchronous and policy-supported, according to much of the & # 39; normal & # 39; post-recession" playbook, "they wrote in a Bloomberg note. "Keep the faith, trust the recovery."
Oil Super Majors Rebound
With these optimistic forecasts about the world economy and a sustained rise, some of the hardest hit oil stocks are strong performances over the past two weeks. Exxon traded at $ 37.59 Monday morning and is up about 20% since Oct. 28, while another oil specialist, Chevron, is up about 30% over the same period.
Despite this impressive move, there are still many risks that could derail this recovery and make oil investments a risky bet for long-term investors.
In the short term, new lockdown measures in Europe and declining consumption in America will cause global oil demand in 2020 to take a greater hit than previously expected, the Organization of the Oil-Exporting Countries said last week. .
That means that it will take much longer for oil giants to reverse their financial situation and invest in growth. Reporting a third consecutive time, Exxon told investors in October that it could cut as much as 15% of its global workforce, or about 14,000 jobs, as it struggles to survive in the recession. The giant is abandoning its previous investment plans to save money for its dividend payments.
In the long run, the outlook for oil companies does not look too bright. According to a recent report by one of the largest oil producers, BP (NYSE :), oil consumption is unlikely to return to pre-coronavirus levels ever again. Even in the most optimistic scenario, demand is no better than "global flat" for the next two decades as the energy transition shifts the world away from fossil fuels.
Bottom Line
Investors are becoming bullish on oil stocks after seeing the prospect of the pandemic slowdown coming to an end next year. When that end comes, that will be positive news for cyclical stocks, including oil majors.
Still, we don't believe oil stocks are a convincing investment for long-term investors. A permanent shift to clean energy, stricter government policies and changes in consumer behavior are some of the factors that can keep oil prices low.
