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It's time to get some "Energy"!

First half of 2017 is over and earnings season would get full-steam in next 2-3 weeks. Given lack of major pre-announcements, there should not be any major surprises coming out of this season. With Fed taking dovish view on interest rates, markets seem to be loving "Goldilocks" scenario "not too hot not too cold". We already know that some sectors are getting hot like technology especially FANG stocks. At same time, it's worth exploring are there any sectors which are "cold" or "out of favor"? And of course one major sector which keeps on coming on radar is "Energy" sector. It started year on high hopes that OPEC deal in Nov would bring back oil markets in equilibrium and with Trump promises economy would grow closer to 3%. Both of these did not pan out in first half. US shell producers and Nigeria/Libya nullified whatever smaller effect OPEC deal had on supply side and due to lack of any concrete steps from Trump and Congress on tax reforms and infrastructure spending, US economy is still far away from growing at 3%. These two factors caused to oil slip back to $42 (before rising back to $46) and causing energy sector to be worst performing sector in S&P (down by over 12% in just 1H2017) So now question is where is energy sector headed. Here are some factors to look at to make prediction:
  • US congress would one way or other decide on health-care before Aug and move onto other important topics like tax-reforms and infrastructure spending, This should get US economy growing closer to 2% (3% growth seems to be pipe-dream)
  • US Fed would continue to be dovish making US $ weaker compared to Euro/Yen/Pound. This should give some boost to oil prices
  • BRICs would continue to grow at healthy pace with India leading the pack (thanks to Mr. Modi's drive)
  • Europe finally would start to grow with all major elections out of way. Merkel is almost guaranteed to win in Sept for another term
  • With all these factors, overall world economy should be in reasonably good shape
  • Opec would continue to make noises on "quotas" and US shell producers would continue to produce at record levels albeit at much lower costs. This would mean Oil would hover around $42 to $52 range for quite some time
What does all these means to companies in Energy sector. In general, they would be ok due to demand not falling off the cliff and supplies coming at lower cost point. So break even prices for all these companies coming down. Some of the companies/ETF to invest during this pessimism would be QEP ($9), SN ($6), HK ($6), MRO ($11.50), REN ($30), XLE ($65), RSPP ($33), APA ($48), TRGP ($44). The stocks and overall energy sector could have deja-vu like 2016 when they roared back in 4Q2016. Same could happen in 2H2017.
Have a great "Energy" driven weekend!
/Shyam

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