As the second trading week of 2019 gets close to wrapping up, both the energy sector as well as oil prices have enjoyed strong gains. In particular, oil prices have seen the longest consecutive rise in prices since 2010, much to the delight of commodities investors who have struggled throughout the last quarter of 2018.
Light, sweet crude increase 0.4% to $52.59 a barrel by the end of Thursday, while Brent crude shot up the same percentage amount to $61.68 – representing its longest streak since September 2007. Despite the steep selloff of oil at the end of December, prices for the commodity have come back strong, gaining much of their losses as the markets shrug off fears of oversupply and weak demand.
At the same time, energy companies have been leading the way in 2019, surging alongside oil prices. Energy companies within the S&P 500 on average have gained 8.89 percent in the first seven trading days of the year and are the best performing sector in the index so far. This increase has also partially due to expectations that Saudi Arabia will be reducing their global exports of oil.
“It’s a battle on where oil prices are headed right now,” said Brandywine Global managing director Patrick Kaser. “Skeptics on energy stocks are making a huge bet that oil prices will fall lower than where they are now. Energy stocks are expensive if you’re willing to make the bet that oil prices stay below $50. But energy stocks are really, really cheap if you think prices go to the low 60s.”
The current bull run has been a refreshing change for investors as Q4 of 2019 was one of the worst quarters for energy stocks in a long time, together losing 24 percent on average in the last three months of the year. At the same time, concerns about oversupply and slowing demand have seen oil prices drop close to 40 percent.
“The move lower in oil prices was overdone,” added another portfolio manager for ValueWorks Charles Lemonides. “Energy companies are still going to be pretty profitable around oil’s current level.”
Another analyst at Commerzbank wrote that “We believe that the current price level better reflects the fundamental data than the price level shortly before Christmas. After all, unless oil demand weakens noticeably, the oversupply on the oil market will gradually disappear,” adding that Saudi-led efforts to curb exports will play a significant role in restoring oil prices to normal levels.
Saudi Arabia previously indicated that it was considering reducing exports to 800,000 barrels per day in a bid to see prices go up to $80/bll, according to The Wall Street Journal. In addition, the Organization of the Petroleum Exporting Countries along with its allies were cutting 1.2 million barrels a day in production. The agreement, signed in early December, was also a move to help restore oil prices.
Profits from energy companies in the S&P 500 are expected to outperform all other sectors going forward assuming oil prices go up. At the same time, however, predicting how oil prices will move has always been an unpredictable thing, and time will tell whether this bull run for energy companies will last.