Why I remain bullish on the energy sector
The algorithms that control trading on Wall Street have finally hit the energy sector. And frankly, it was ugly. The folks at Bespoke noted that the SPDR Energy Select Sector Fund (NYSEARC:XLE), which tracks energy stocks, fell about 22% from its high of $93.31 on June 8 to $73.49 at last Friday’s close. Since 1990, the energy sector has seen only a drop of more than 20% in eight trading days in October 2008 and March 2020.
But I’m not worried.
Such oscillations are normal and exaggerated by the algorithms.
So today Market360, we’re going to take a look at some of the current concerns about the energy market…and I’ll share why I still think this is a great place to invest our money in the current market environment.
Biden’s Appeal to Big Oil
The Biden administration recently sent a letter to seven major oil companies, including ExxonMobil Corporation (NYSE:XOM), BP plc (NYSE:BP), Shell plc (NYSE:SHEL) and Valero Energy Corporation (NYSE:VLO). The letter called for “immediate actions” to provide more fuel and said his administration was prepared to use “all reasonable and appropriate tools” to increase the fuel supply.
President Biden asked refiners to explain why they shut down some fuel manufacturing plants. The Biden administration has argued that these shutdowns have contributed to “an unprecedented reduction between the price of oil and the price of gas.”
Biden’s letter concluded by saying, “But in wartime, far above normal refinery profit margins passed directly to American families are not acceptable.”
American Petroleum Institute (API) President Mike Sommers said API welcomed the opportunity “to engage in increased dialogue with the White House”, but then added that “the political agenda Biden administration’s misguided move away from domestic oil and natural resources.” the gas added to inflationary pressures and added headwinds.
API added that U.S. refineries were currently operating near capacity and fuel production was near the top of the five-year range.
The the wall street journal then published an excellent article on how high US exports of refined fuels to Latin America and other markets have contributed to higher pump prices, particularly of diesel fuel, which the US exports for decades.
The truth is, one barrel of refined crude oil typically produces 19 gallons of gasoline, 12 gallons of diesel, and other distillates, like kerosene, jet fuel, and fuel oil. The US refining industry has always produced more diesel than it needs, so it has been exporting distillates like fuel oil and diesel to Latin America for decades.
Now, the Biden administration is implying that these fuel exports are responsible for driving up prices at the pump, but that is hugely misleading.
In fact, the Biden administration’s new press secretary, Karine Jean-Pierre, recently said that the United States does not need to drill for more crude oil, but simply to increase its refining production to lower prices at the pump.
Then this week, in an attempt to curb the pinch at the pump, Biden suggested a gas tax exemption. If adopted, it would reduce the cost per gallon by about 18 cents (24 cents for diesel)…but there’s no guarantee the savings will be passed on to the consumer.
The fact is, even with the current spike in gasoline prices, demand hasn’t diminished…at least not yet.
And that’s great news for our energy stocks…
Oil and Energy remain a strong buy
Here’s the reality: We’re fast approaching second-quarter earnings season, and the energy sector is shaping up to be the biggest winner. According to FactSet, earnings for the S&P 500 energy sector are expected to rise 213.1% year-over-year. 18 out of 20 companies in the energy sector saw their average earnings per share increase.
Right now the markets are pricing in lower demand for oil, but the oil companies are still showing strong operating margins, which is why I expect them to post record profits in course of the next quarter. Wall Street generally rewards companies that show strong earnings and sales results. So I fully expect energy company stocks to fall and be pulled higher following their better than expected earnings reports.
That’s why this Friday Growth investor July monthly issue my list of top 5 stocks is full of energy stocks.
Now I must also add that I expect from all my Growth investor stocks are doing well in the coming weeks. The fact is, these stocks are characterized by annual sales growth of 61.6% and annual earnings growth of 429.2%, but are trading at only 8.5 times median expected earnings!
In addition to my top 5 stocks list in this month’s issue, I add three exciting new actions. These companies have not only expected strong earnings growth but also benefited from positive analyst estimates and continued institutional buying pressure.
I am acutely aware of rampant recession fears as the Treasury yield curve briefly inverted and the Fed, along with other central banks, had to raise key interest rates, spooking investors.
But the fact is my Growth investor stocks are poised to take advantage of all the inflation chaos, as we are packed with stocks in energy, fertilizer, food, shipping and specialty semiconductors. These stocks are an oasis for investors looking steady growth in sales and profits.
As I said, tomorrow I will publish three new recommendations that should work well in this inflationary environment.
To access the issue as soon as it is published, simply click here to join me on Growth investor today.
Publisher hereby declares that as of the date of this e-mail, Publisher owns, directly or indirectly, the following securities which are the subject of commentary, analysis, opinion, advice or recommendations in, or which are otherwise mentioned in, the dissertation below:
BP plc (PB), Shell plc (SHEL), Valero Energy Corporation (VLO)