It’s almost head scratching.
With all of this news surrounding clean energy, a reduction in fossil fuels, and a new green infrastructure, you would think oil stocks would be in the toilet. But for most oil and gas stocks, 2021 is off to an incredible start. Some oil stocks are seeing the most growth in over 5 years.
So why is oil rebounding?
How long can this oil rebound last?
Should you play the oil boom?
These are all great questions. Let’s start with the first.
Oil shares are rebounding dramatically for three reasons.
The first reason is that oil took a pounding last year. With everyone in the world on complete lockdown and no one traveling anywhere, demand for any transportation that ran on fossil fuels cratered. And with it, the price of oil stocks.
XOP, the SPDR Oil and Gas ETF, saw its worst performance in over 10 years. Other oil stocks like Exxon and Chevron tanked as well fell to lows not seen in nearly a decade.
So, when you look at these stock prices, they are really at their rock bottom.
And now that there is light on the horizon in the form of a major vaccination roll out, people are once again going to travel and go on vacations. And by all indications, they will do so in droves, sending the demand for oil through the roof (relatively).
The second reason is that Saudi Arabia just cut supply by 1 million barrels a day. This is a huge reduction in global supply – more than 1% of the world’s oil supply. This reduction sent oil prices up 4% to levels that had not been seen since early last year. Obviously cutting oil production by those measures produces a better balance between supply and demand.
The third reason is that even with this major ESG boom, there is still going to be a need for fossil fuels. The ironic part of this is that a lot of the proposed “Green Infrastructure” by the Biden administration is going to rely on fossil fuels to build. Solar panels, turbines, and even the medical supplies for the vaccines all need fossil fuels to be built.
So, while the long term approach is to move away from fossil fuels to a clean and green society, we still need fossil fuels to help us get there.
In our opinion, not very long. It seems more like a value play for 2021 than any type of long-term resurgence. Oil is at rock bottom prices and there is pent up demand for travel, so you are going to see some serious growth this year once revenues hit.
Experts are predicting that 2021 is going to get a 350,000 barrel-per-day boost. That is a huge uptick in demand but not enough to outweigh the sizeable, macro headwinds in its face. With the new administration putting $2trillion dollars behind green initiatives and taking immediate action such as cancelling the Keystone Pipeline, oil will most likely be facing an uphill climb for years to come.
That depends on the type of investor you are. If you are a short-term, risk tolerant, value investor, then this could be an angle you should take a close look at.
However, even with this rebound in oil, clean energy stocks and impact investing are still crushing oil in comparison. And these clean stocks are just getting started.
Let’s compare some of the major ETF’s performance between the two sectors.
Oil in 2020
XES, the SPDR S&P Oil and Gas Equipment & Services ETF lost -43.5%
XOP, the SPDR S&P Oil and Gas E&P ETF lost -36%
Clean Energy in 2020
TAN, Invesco Solar ETF grew 234%
PBW, Power Shares WilderHill Clean Energy ETF grew 205%
Oil in 2021
XES, the SPDR S&P Oil and Gas Equipment & Services ETF gained 11.3%
XOP, the SPDR S&P Oil and Gas E&P ETF gained 15%
Clean Energy in 2021
TAN, Invesco Solar ETF grew 18%
PBW, Power Shares WilderHill Clean Energy ETF grew 26%
These are just a few examples, but they are very representative of the sector performance overall. As you can see, even with the oil boom, green energy and social impact funds could be a much better place to put your money. Impact investing is growing at an accelerated rate with no signs of slowing down. Oil will grow this year but its heading into a serious storm.