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[Industry Insights] Energy stocks 'clash of the titans' – what are the market’s differing views on energy stocks?

It’s here! Following the launch of the two previous 'Cyclical Stocks' Industry Insights, it received widespread attention and discussion among fellow investors. This edition of Industry Insights focuses on energy stocks within cyclical stocks, with a particular emphasis on oil and coal, to observe and gain insights into the market.

Persistently high inflation in the US, coupled with changes in the Russia-Ukraine situation affecting global energy supply, has pushed WTI crude oil above $130, fueling a boom in oil and gas stocks. After a recent pullback, prices have risen again, with new highs seen in sectors like integrated oil and gas in the US stock market; American coal prices also hit record levels, with the coal sector continuing to strengthen across Hong Kong, US, and mainland China markets.

However, as cyclical stocks, there is significant market division over the energy sector. To better understand the current value of energy stocks, follow our popular investor as we explore the 'high-stakes debate' on the future outlook for energy stocks.

1. Introduction to Energy Stocks

Traditional energy, also known as conventional energy, refers to energy resources that have been produced on a large scale and widely utilized. This includes coal, oil, natural gas, and nuclear power. Coal, oil, natural gas, and nuclear power are all one-time, non-renewable conventional energy sources, while hydropower, wind power, and solar power belong to renewable energy. Despite the world's efforts to develop clean energies such as hydrogen, solar, and wind power, the share of traditional energy production is gradually declining, but currently, traditional energy still dominates globally.

In the US stock market, there are numerous energy stocks, such as Exxon Mobil, the world's largest publicly traded oil company by market capitalization, Chevron, one of the largest multinational energy companies globally, Occidental Petroleum which was recently heavily purchased at high prices by Buffett and is expected to deliver strong Q1 earnings, and Peabody Energy, the largest private coal company in the US, which has shown sharp upward momentum recently.

In the Hong Kong stock market, traditional energy stocks represent a significant sector as well, where the 'Big Three Oil Companies'—PetroChina, Sinopec, and CNOOC—are listed. Together, their combined market cap exceeds HKD 1.5 trillion. The coal sector, traditionally referred to as 'black gold,' has recently experienced a 'coal craze.' China Shenhua, the world’s largest coal company, has continuously hit new highs, announcing substantial dividends. Other major players like Yanzhou Coal Mining and China Coal Energy have surged over 60% year-to-date.

2. Current Status of Global Energy Distribution and Supply-Demand Situation

Overall, fossil fuel consumption still dominates the energy landscape.In 2020, fossil fuels accounted for approximately 83% of total energy consumption, a decrease of less than 3% compared to 2000. The global energy structure remains highly dependent on oil, coal, and natural gas, with oil accounting for about 34% of energy consumption in 2020, coal around 30%, and natural gas about 24%.The energy supply-demand dynamics of China, the US, the EU, and Russia are key to understanding global energy issues.

On the supply side of the oil market, global oil reserves reached 1.7324 trillion barrels in 2020, with oil resources mainly distributed in the Middle East and the Americas. The regional distribution of oil production is generally consistent with that of reserves. In 2020, the United States ranked first in oil production at 16.476 million barrels per day, followed by Saudi Arabia, Russia, and Canada. Global oil consumption in 2020 was 88.477 million barrels per day, with an average annual growth of 0.2% over the past decade. The Asia-Pacific region had the highest demand at 38%, followed by North America and Europe.

On the demand side of the oil market, global oil consumption in 2020 was 88.477 million barrels per day, with an average annual growth of 0.2% over the past decade. The Asia-Pacific region had the highest demand at 38%, followed by North America and Europe. The United States ranked first in demand at 17.178 million barrels per day. China, India, and Japan in the Asian region are the second, third, and fifth largest demand countries globally.

III. Market divergence on energy stocks

The market holds many divergent views on energy stocks, including strong bullish perspectives, as well as those of wait-and-see or even strongly bearish opinions.

While 'God of Crude Oil Trading' Pierre Andurand boldly predicts 'oil prices will soar to $200 this year,' Goldman Sachs champions a commodities 'supercycle.' Meanwhile, Morgan Stanley sees it as the 'end of the cycle'...

Major investment banks, large institutions, asset management firms, and broker analysts at home and abroad hold their own views on the future of commodities and energy stocks. Follow along with our popular investor to see what they have to say.

1. Bullish camp

Goldman Sachs: Commodities are in a 'volatility trap' and the supercycle is still in its early stages

Jeff Currie, head of Goldman Sachs Commodities Research, recently stated that commodities are caught in a 'vicious cycle,' with prices set to soar alongside volatility. The commodities market is falling into a volatility trap. Goldman Sachs believes there is only one thing that can end a supercycle, and that is — investment.

In an article from October last year, Currie pointed out that the root cause of the supply crisis in commodities during the post-pandemic recovery could be traced back to the long-term underinvestment in the old economy globally after the financial crisis. He further argued that as the old economy struggles and the new economy’s growth rate is insufficient to fill the gap, pressure on commodity prices will re-emerge, heralding the arrival of a new commodities supercycle.

Minsheng Securities Strategy Commentary: Positioning for a True Cycle

Since 2010, global commodity prices have trended downward, and cyclical stocks dependent on price forecasts have increasingly been avoided. We believe there is a highly rational logic behind this: the best trading strategy in a downward trend is to avoid it altogether. However, when we face a long-term upward shift in inflation, assets reliant on price forecasts should no longer be avoided. A true cyclical rally is not just about simple economic stabilization or merely the Russia-Ukraine conflict; investors are advised to actively position themselves. Sectors recommended include non-ferrous metals (copper, aluminum, gold), crude oil (oil and gas extraction, oil transportation), and coal. In the path to betting on demand recovery, recommended sectors include banking and real estate.

Guojin Securities: Petrochemical Industry Research

We believe that even if there is a de-escalation in the Russia-Ukraine situation, an Iran nuclear agreement reached, Federal Reserve interest rate hikes, the U.S. releasing strategic reserves, or another outbreak of the pandemic leading to falling oil prices, it does not change the fundamental fact that crude oil supply and demand will remain tight in the medium to long term, and prices will inevitably rise again sooner or later.

After analyzing multi-dimensional data such as capital expenditures, production, and cash flow from 41 key global oil and gas companies, we found that most oil companies in the current high-oil-price environment prefer to reduce corporate debt and increase shareholder returns. Even when capital expenditures are increased, they focus more on 'quick fixes' rather than addressing the root problem. This manifests in accelerating the depletion of inventory wells or releasing strategic reserves to boost short-term crude oil supply while being very cautious about increasing medium to long-term supply. Meanwhile, shale oil faces a declining resource grade trend, resulting in shale oil production growth potentially remaining below expectations in the long run. Moreover, the West's 'significant carbon reduction by 2030' policies fundamentally suppress the willingness of traditional fossil fuel companies to build medium to long-term capacity. These 'expiration date' policies for fossil fuels are unprecedented in any previous energy mega-cycle, and the market severely lacks awareness of this.

Cinda Securities: Research on the Impact of Each Fed Rate Hike Cycle on Energy Prices

The continuous rise in energy prices starting in the second half of 2020 is fundamentally driven by the capacity cycle, compounded by prolonged monetary easing. Even if we see aggressive tightening policies reminiscent of the 'Volcker era,' the upward trend in energy prices would be difficult to reverse. The root cause of this round of energy price increases lies in the severe underinvestment in energy resources over the past three to five years, where lagging new capacity investments have created a supply-demand mismatch, making energy demand elastic while energy supply remains inelastic or has low elasticity in the present and foreseeable future.

The energy resource sector is expected to enter an upward cycle in the next 3-5 years, with the industry transitioning from several years of downward volatility to several years of upward volatility. We remain firmly optimistic about this round of major energy inflation and continue to strongly favor the historic allocation opportunities for upstream energy resources such as coal, oil, and gas within the production capacity cycle. It is recommended to increase exposure to fields related to the upstream extraction, equipment, and technology of coal, crude oil, and natural gas.

Energy stocks becoming everyone's darling? The hedge fund that once accurately bought GameStop has also made a big bet.

Richard Mashaal, Co-Chief Investment Officer of Senvest Management, the Canadian hedge fund that gained 86% last year, believes that the traditional energy sector will require substantial capital to address years of underinvestment. It will take several years to meet market demand. The outlook for oil and gas stocks over the next one to two years is very optimistic. Currently, a quarter of his portfolio is invested in fossil fuel stocks. According to his analysis, valuations of oil and gas stocks are still low, and they are expected to rise further strongly this year.

2. The cautious camp

Changjiang Futures: Energy and Chemical Daily Report

Currently, the US continues to strengthen sanctions against Russia and supports military aid to Ukraine. The EU remains divided on whether to impose sanctions on Russian energy. Russia and Ukraine continue to clash in eastern Ukraine, and the situation has not changed significantly recently. The release of reserves by the IEA is expected to fill the short-term gap caused by the decline in Russian supply. However, due to ongoing sanctions by Europe and the US, there may be a further drop in Russian supply in the future. Therefore, oil prices do not have the basis for a sharp decline and are expected to remain highly volatile. It is recommended to reduce positions and focus on risk.

3. The bearish camp

Morgan Stanley's view of 'late cycle': Stock market rises, commodities outperform

Since the beginning of this year, global stock markets have risen, and commodities have surged. However, Morgan Stanley believes that the recent market performance resembles the late stage of a cycle.

Andrew Sheets, Morgan Stanley’s Chief Cross-Asset Strategist, pointed out in a research report that the current market exhibits indicators typically seen in a 'late-cycle' phase.

First, key US Treasury yield curves such as the 2/10-year have recently inverted, which often signals an economic recession. This is also the most closely watched recession signal in the bond market.

Second, robust economic growth, rising inflation, and policy tightening are often common patterns that appear in the 'late expansion' phase of the cycle.

Sheets believes that strong economic growth momentum will push the unemployment rate to a cyclical low, driving up inflation, which in turn pushes up interest rates, flattening the yield curve and eventually leading to an inversion.

Why is Bloomberg Intelligence bullish on gold but bearish on oil?

In a report released in March, Bloomberg Intelligence said that gold prices could rise to $2,500 per ounce by the end of this year, while oil prices might fall to around $50 per barrel, as gold has been one of the best-performing assets this year, whereas oil will still face the drag of weak future demand.

Mike McGlone, senior commodity strategist at Bloomberg Intelligence, stated, 'The market may be heading into a prolonged period of risk aversion, which is crucial for reducing inflationary pressures. Gold, along with long-term US Treasuries and Bitcoin, could emerge as one of the primary beneficiaries. The ultimate scenario for this year might be $2,500 gold, $50 oil, and an economic recession.'

Founder Futures: Daily Report on Crude Oil and Asphalt

While some institutions predict a significant supply gap in the oil market amid the possibility of a substantial decline in Russian energy exports and insufficient new supplies, recent shipping data indicates that imports of Russian crude oil by some Asian countries have significantly increased following a sharp discount in Russian oil prices. This increase in 'eastbound exports' has partially offset the decline in 'westbound exports'.

Strategic oil reserve releases by multiple countries, a potential smaller-than-expected drop in Russian crude exports, and weakening demand due to economic slowdown pressures suggest short-term prices may see a minor rebound. However, overall gains will be limited, and the overall valuation of crude oil will be adjusted downward, with expected peaks in the trading range continuously declining. From an operational perspective, there may not be many medium-to-long term trend opportunities.

Zhongtai Futures: Short-term rebounds may not alter the long-term gradually declining trend.

It is expected that domestic crude oil will also rebound in the near term, driven by external markets. However, the overall trend of easing tensions will not change, and the probability of crude oil prices surging again to new highs has diminished. At the same time, factors such as a new Iran nuclear agreement, the recovery of Venezuela’s crude oil supply, crude oil demand countries releasing reserves, and lockdowns due to domestic outbreaks, while not being the main drivers changing the crude oil trend, may become contributing factors accelerating the decline of crude oil when there is substantial easing in the Russia-Ukraine conflict. In short, short-term rebounds in crude oil are unlikely to alter the medium- to long-term weakening trend, and it is not recommended to chase long positions.

IV. Disagreements Among Fellow Investors on Energy Stocks

In investment circles, fellow investors, as market participants, have equally put forward very insightful investment views on the future of energy stocks. Let's take a look at some of these perspectives.

@趋势交易叶荣添：Why are we always right in the process of trading, but not in the outcome?

Previously, cyclical stocks became the common enemy of the entire market, with everyone seemingly saying that they were wrong, and upstream inflation should not yield excessive profits; instead, downstream sectors like Moutai and Wuliangye, or consumer goods giants, should be the ones making big profits. However, the background here is that countries have been printing money, causing many assets to more than double in value, while over the past decade, many cyclical stocks saw lackluster performance. Therefore, this is a redistribution of profits, a process where profits shift from downstream back to upstream. The market seems to be investing based on momentum, with coal and steel benefiting from high certainty of earnings due to strong sector performance.

@郭二侠鑫金融：Resource stocks have soared in this rally.

The war between Ukraine and Russia has reached a point where both sides find it difficult to back down. Even if the war ends on May 9, the devastated Ukraine will need time to restore production, and Western sanctions on Russia will not be lifted anytime soon. This means supply gaps will persist. Therefore, resource stocks have become the focus of the capital markets: in the US, it's oil, while in China, it's coal. Coal stocks are the best-performing sector this year, now combining with various mining stocks to form a new track, showing independent momentum.

Commodity prices are already at their peak, and what can further boost valuations is sustainability logic. Resource stocks have two opposing arguments.

One argument is that reduced demand would lead to less raw material usage, and once volumes drop, price increases would be offset. On the contrary, another argument is that as the pandemic eases and society gradually returns to normal, the demand for raw materials will be robust, keeping commodity prices high.

@江湖故人818：What stage of investment are cyclical stocks currently in?

What stage of investment are cyclical stocks currently in? Will there continue to be major movements afterward? I would like to analyze this question from three perspectives.

First, from the perspective of the macroeconomic fundamentals, the global economy is currently in a transition period moving from an overheating phase into a stagflationary phase, which corresponds to the shift from the first quadrant to the fourth quadrant of the Merrill Lynch Investment Clock.

Second, from a technical analysis perspective, sharp and rapid price increases at steep angles are often unsustainable and typically occur towards the end of an upward trend.

Third, analyzing the international political situation, inflation on a global scale has reached levels that are unacceptable to the general public. These variables will accelerate the arrival of a turning point for oil, and the inflection point for oil will also signal a turning point for most commodities.

Conclusion:

After reviewing the market’s differing views on energy stocks, what thoughts and insights do fellow investors have?

1. What is your view on energy stocks?

2. What will be your strategy towards energy stocks going forward?

3. Besides energy stocks, what other potential investment opportunities have you identified?

Fellow investors are welcome to discuss these topics in the comment section (within 300 words). Outstanding comments will have the opportunity to receive188 points as a rewardShare your unique perspectives on energy stocks and investments!

Note: The fellow investors whose insightful comments were adopted will also receive a reward of 188 points.

Previous series columns:
[Industry Insights] A comprehensive guide to investing in cyclical stocks! Can cyclical stocks still offer 'effortless gains'?
[Industry Insights] What changes have occurred in the market's perspective on cyclical stocks this week?
[Industry Insights] A comprehensive guide to investing in real estate stocks! Is it still a good time to invest in recently surging real estate stocks?