Prospects of the Oil and Energy Sector
Jack Londono ‘24
The oil and energy industry has been completely battered over the past year and a half. The first and most obvious reason is the fact that COVID-19 has had a great impact on almost all industries of the economy, many of which thrive on oil and energy, especially the travel industry. With a decrease in demand in these sectors, oil and energy demands greatly decreased as well. But the impact that COVID-19 had on the industry was like throwing gas on an already burning flame.
Before COVID-19 became a widespread issue across the United States, and the world, Saudi Arabia and Russia initiated an oil price war on March 8th, as both countries failed to agree on a set amount of oil production. The price war ended a month later when the Organization of the Petroleum Exporting Countries (OPEC) finally agreed to cut oil production by 9.7 million barrels a day.
As a result of said disagreements and delayed response from OPEC, there was an oversupply of oil in April, leading to a collapse in oil prices. High levels of inventory caused the contract futures price for West Texas Intermediate (WTI) to plummet from $18 a barrel to -$37. The average level of prices per barrel of oil in April was $18, much lower than the monthly average of $64 in January.
As the first half of the year came to a close, oil markets began to rebound as countries came back from the initial lockdown. In June, crude oil prices stabilized at an average of $40 a barrel, which was led by OPEC’s production cuts. Oil prices continued to recover in the second half of 2020 as OPEC continued to limit oil production increases in order to keep prices and supply streams stable. By the end of the year, optimism about vaccine rollouts helped bolster the market even more.
That brings us to the present. Businesses and sectors of the economy continue to open, leading to greater demand for oil and energy. The Energy Sector SPDR Fund (XLE), which monitors the top companies that develop and produce crude oil and natural gas and provide drilling and other energy-related services (such as ExxonMobil Corporation and Chevron Corporation) is up 25% year to date, duly pricing in this surge in demand. Analysts believe that the energy sector is extremely oversold in the stock market and see tremendous upside throughout 2021 and the years to come as forecasts for oil companies’ earnings increase.
https://www.sectorspdr.com/sectorspdr/sector/xle
https://www.cnbc.com/2021/01/13/energy-is-no-longer-a-buy-and-hold-sector-trader-says.html
