The Possibility Energy’s Outlook Has Improved With Biden
“The stock market is soaring due to certainty about the election, the arrival of a Covid-19 vaccine and huge stimulus spending plans. Why are oil stocks outperforming given an anti-oil administration? We look at history. ”
The stock market is a fascinating beast. It often confounds conventional wisdom. That is due to the stock market being a giant discounting machine. What we never know, however, is how far into the future it is willing to look and deliver a view – although not always right. Maybe what we are seeing in today’s stock market action is that the conventional view of those industries that win and those that lose with a new administration running the government is right.
For example, on November 3, election day, the price of West Texas Intermediate (WTI) closed trading at $37.66 per barrel. WTI closed trading last Wednesday night, before the Thanksgiving Day holiday, at $45.71, a 21% increase. Yes, there were reports that the OPEC-plus group of oil providers might extend their current output cuts into early next year, rather than restoring supply as has been anticipated. At the same time, the surge in coronavirus cases worldwide was pushing governments everywhere to clamp down on activity, which does little but undercut economic activity and oil demand. So, why would oil prices be rising, especially as fears grow about Cushing, Oklahoma’s oil storage tanks filling rapidly, recreating the psychology that briefly drove WTI into negative price territory. Quite possibly oil prices are reacting to revelations that OPEC countries are raising their export prices for those barrels moving into Asian markets.
Both the oil storage and Asian demand strengthening issues are fairly short-term in nature, but the overriding trend for oil is presumably negative, given President-elect Biden’s campaign promise of no role for oil in his plans to make the U.S. economy net carbon-free by 2050. While Mr. Biden waffled back and forth, when political-correctness demanded it, on the issue of banning hydraulic fracturing, he has been firm that the oil industry is not the energy future of this country.
Mr. Biden’s plan is only the latest in a growing list of countries and companies vowing to reach net-zero emissions in the 2030s, leading to forecasts about when global peak oil demand will be reached. But, as Robert McNally, founder of energy consulting firm The Rapidan Group, questioned during the Dallas and Kansas City Federal Reserve Banks’ energy conference, is peak oil demand reality or wishful thinking? In his view it is the latter. That is not the mainstream view, yet oil prices are going up and energy stocks are outperforming the overall stock market. What’s going on? We don’t have the definitive answer, but we think by looking at some history, we may divine an outlook.
Although we hate to dredge up bad memories, the performance of energy stocks compared to technology stocks since the last presidential election provides a sobering lesson. Exhibit 10 shows the performance of the leading tech (QQQ) stock index and the leading oil (XLE) and oilfield service (OSX) stock indices. We tracked the three indices from the beginning of November 2016, a few days before President Donald Trump’s surprising election victory until the night before Thanksgiving Day. The chart is not a pretty picture for energy investors, or anyone involved in the energy business.
Exhibit 10. The Sad History Of Energy Stock Investments SOURCE: Yahoo Finance, PPHB
As the chart shows, between November 1, 2016, and November 25, 2020, the QQQ was up an incredible 159%, while the XLE index lost 42% and the OSX was off an amazing 76%. During this time period, the weighting of energy stocks in the Standard & Poor’s 500 Stock Index (S&P 500) shrank from 7.5% to under 2%. Given that performance, it is not surprising that energy stock performance in the S&P 500 was either the second worst or the worst, including through the first half of 2020.
Exhibit 11. Energy Has Been Worst Performing Sector SOURCE: S&P, PPHB
Between Election Day 2016 and last Wednesday afternoon, oil prices were 2.3% higher, an increase of slightly more than a dollar a barrel. That is surprising because most of us remember oil prices being substantially higher, and actually negative during this time period. But what we find is that between the two election dates, oil prices fell 16%, or over $7 a barrel. This demonstrates how strong the oil price increase during November had been.
Exhibit 12. The Strange Journey Of Crude Oil Prices SOURCE: EIA, PPHB
No period in the stock market is ever exactly the same, especially since the market is always looking forward to a future it views either more or less favorable to current conditions. If we look at the performance of the three stock indices for the periods November 1, 2016, to January 31, 2017, and October 1, 2020, to November 25, 2020, we see interesting patterns. Keep in mind that heading into the November 2016 election, then-candidate Donald Trump’s prospects for defeating Hillary Clinton looked poor. He was battling the emergence of the Hollywood Tapes where Mr. Trump made disparaging remarks about females. Of course, Mrs. Clinton was attempting to weather the reopening of the investigation of her handling of her government emails. However, on the eve of the election, the pundits had Mrs. Clinton the overwhelming favorite.
Mrs. Clinton was supposed to represent the third Barack Obama term, which envisioned a continuation of the globalist thrust, coupled with increased regulation that ensured a continuation of the existing slow economic recovery. That scenario was thought to be challenging for energy, especially after world oil prices had crashed in late 2014. President Trump’s victory signaled an ‘America First’ approach to governing the country and the economy. That was seen to spark a rebirth for domestic manufacturing, fewer regulations on industries, especially oil and gas, and lower taxes that would lift energy demand. That scenario was greeted on Wall Street with unbounded enthusiasm, as American businesses and energy would benefit to the detriment of globally-oriented companies.
During the period November 1, 2016, to January 21, 2017, the S&P 500 rose 6.5%, while the Dow Jones Industrial Index (DJIA) climbed 8.4%. As shown in Exhibit 13, during that period the QQQ advanced 7.3%, as the XLE increased 6.2%, but the OSX soared 18.9%. The most volatile oil patch sector, and the one with the greatest earnings torque, demonstrated the strongest performance. That is what one would have expected, although the surge in market enthusiasm for the Trump victory propelled all stocks higher during the celebratory days following the election.
Exhibit 13. All Stocks Rose After 2016 Trump Election Victory SOURCE: Yahoo Finance, PPHB
In the most recent election period, October 1, 2020, to November 25, 2020, both the DJIA and the S&P 500 advanced by 7.4%. In contrast, tech stocks, as reflected by the QQQ, only rose 5%, while energy has soared, with the XLE up 35.6% and the OSX up an incredible 58.5%.
Exhibit 14. Energy Stocks Are Rocking After The Election SOURCE: Yahoo Finance, PPHB
It is impossible to make predictions about the next four years, but it seems ironic that the energy stocks have soared in the days following the election of the most anti-fossil-fuel-president in modern time, while the internationally-focused technology stocks (big supporters of President-elect Biden) are lagging the overall market. After the 2016 election, we saw all stock prices rise, but the tech stocks outperformed the broad oil index, while oilfield service stocks way outperformed both indices and the overall stock market. The subsequent four years turned into a nightmare for energy and energy stocks.
Don’t break out the champagne yet, but one could envision an anti-fossil-fuel-administration hurting the energy industry to the point that world oil prices have to rise, and rise substantially, to ensure sufficient energy to power the global economy as renewables performance, despite governments mandating them and throwing money at them, falls well short of forecasts. Welcome to the world of Humpty Dumpty, sometimes known as the stock market.