Overnight crude oil hit fresh 1-year highs yet most of the local Energy Sector is down significantly over the same period e.g. Woodside (WPL) -25% and Santos (STO) -18%. Also, the stocks are well below their highs of January, the question we ponder today is whether stocks have got it wrong and are poised to play catch up with the underlying commodity, are they accurately predicating a downturn in the price of oil or are things simply now in equilibrium after stocks got carried away last month as equities rallied strongly.
March crude futures closed above $US56/barrel overnight while the December contract closed just below $US53, not major backwardation but still an indication the market believes prices will be lower late in the year. If nothing else this is another example that investors must be prepared to sell strength when it gets too extreme in 2021 if they want to outperform.
Importantly idealists must remember that while the trend is towards green fossil fuels will be satisfying much of global energy demand for the coming decades. Beliefs and views aside there will remain solid opportunities in oil, gas and coal stocks through 2021.
The chart below illustrates the strong correlation between Santos (STO) and the oil price. Interestingly last August STO did pick the turn lower in the oil price by about a fortnight but on balance we feel the risk / reward favours some catch up by Santos, even if we see a period of consolidation by oil whereas the spike higher last month does simply feel like a period of euphoria where stock prices in the sector traded with far too much optimism.
The recent underperformance by oil stocks compared to the underlying commodity price is not an Australian phenomenon as can be seen from the chart below which looks at the US Energy Sector, it’s almost identical to Santos (STO). Notably the US sector remain well below its’s mid-2020 highs, a level we believe will be surpassed this year.
Today I have briefly looked at 3 major stocks in the local space with an eye firmly on risk / reward as the oil price continues to grind higher.
