Four Reasons to be Bullish on the Energy Sector
Dear Reader,
Last week was a particularly volatile week on Wall Street, with the stock and bond markets both seesawing back and forth. Several factors were driving the action.
First, there was lingering confusion surrounding the latest unemployment report. Then, there was also anticipation for and reactions to the most recent consumer and wholesale inflation reports.
But what really caught my attention was the substantial uptick in volatility in the energy patch. When you couple the fluctuation in energy prices with the underperformance of a lot of energy stocks in 2023, it’s not too surprising that there’s one question I’m asked a lot these days…
“Do you still like energy?”
The simple answer is yes. As my longtime followers know, I have been bullish on crude oil and natural gas stocks – even with the softness in the energy patch in the past year.
So, in today’s Market 360, I’ll share four reasons why I’m bullish on energy. Then I’ll share where you can find the best energy plays now…
Greater Forces Are at Work
Right now, several forces at work should drive energy prices higher in the upcoming weeks and months, especially after February, when seasonal demand picks back up.
Reason No. 1: Severe Winter Weather
First, natural gas-related stocks are some of the biggest beneficiaries of severe winter weather. The U.S., especially the northeast, has been battered by a couple of snowstorms over the past week. The storms brought snow, blizzard conditions, tornadoes and flooding across the U.S. – and close on its heels were more blizzard conditions for the Midwest and an arctic blast that froze states in the western, eastern and central U.S.
Europe is also forecast to experience its own bout of winter weather and freezing temperatures in January. Bloomberg reported that a survey of meteorologists revealed expectations for temperatures to fall below seasonal norms in the U.K., France and Germany in the upcoming days. And Sweden has already experienced its coldest January temperatures in 25 years.
In the wake of the winter weather and extremely cold temperatures, natural gas prices jumped over the past week. February deliveries increased 13.4% to $3.378 per one million British thermal units (MMBtu), the highest level in two months.
Reason No. 2: Dropping Oil Inventories
Second, crude oil prices remain volatile week to week but should pick up due to tightened supplies and increased demand this spring. The Energy Information Administration (EIA) recently reported that crude oil inventories declined by 5.5 million, 6.9 million, 7.1 million and 5.2 million barrels over the past four weeks.
Reason No. 3: Escalating Tensions in the Middle East
I should also add that the escalating tensions in the Middle East will likely drive energy prices higher. The reality is that wars and military conflicts can potentially disrupt commerce and re-ignite inflation.
As an example, British and American warships, as well as cargo ships, have taken fire from Houthi rebels in Yemen in the Red Sea. The U.S. Navy even sank three Houthi rebel ships in response to a distress call from a merchant vessel. As a result, the insurance industry has redirected ships away from the Red Sea, and that’s raising the price of liquified natural gas (LNG) and container goods.
In addition, Libya’s largest crude oil field, which produces 300,000 barrels per day, was shut down due to protests. India’s imports of Russian crude oil in December also plunged to the lowest level in 11 months after six Russian crude oil tankers could not deliver due to tighter sanctions and payment issues.
Speaking of Russia… the country’s pipeline from the Arctic is at risk of freezing and breaking. The fact is that oil needs to flow through the pipelines, otherwise the pipelines will freeze. If the pipeline freezes and breaks, repairs are next to impossible in the winter months. So, all that oil would disappear from the market and drive crude oil prices back to $100 per barrel.
Reason No. 4: The Fourth-Quarter Earnings Season
Finally, the fourth reason why I think investors should continue to hold energy stocks is simply because most energy companies are expected to report positive earnings for the next three quarters.
It is important to remember that energy stocks are seasonal. There are two quarters a year where they’re a little out of sync, and there are two quarters a year they naturally beat. And we’re going to see the energy stocks join the party and become the strongest sector for the next three quarters. Here’s why…
Currently the energy sector as a whole is forecasted to post a 29.6% earnings decline in the fourth quarter. As we discussed, due to easy year-over-year comparisons, plus firm crude oil and natural gas prices, the energy sector should lead the S&P 500 for the next three quarters.
The bottom line: There are four catalysts to drive energy stocks higher, which is why I am not only bullish on energy stocks but recommend the crème de la crème of energy stocks in Growth Investor.
The energy companies I recommend in Growth Investor are great holdings that will “zig” when others “zag” – which will give your portfolio an extra boost when the broader market rallies, as well as protect it if the broader market turns south.
So, if you want to make sure your portfolio is filled with the best energy stocks – as well as fundamentally superior stocks in other sectors – then join me at Growth Investor today. You’ll receive instant access to all my Buy List stocks, as well as all my Growth InvestorMonthly Issues, Weekly Updates, Special Market Podcasts – and much more.
Click here to become a member now.
(Already a Growth Investor subscriber? Go here to log in to the members-only website.)
Sincerely,
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