The algorithms that control trading on Wall Street finally hit the energy sector. And quite frankly, it’s been ugly. The folks at Bespoke noted that the Energy Select Sector SPDR Fund (XLE), which tracks energy stocks, fell about 22% from its high of $93.31 on June 8 to $73.49 by last Friday’s close. Since 1990, the energy sector has only experienced a more than 20% drop in eight trading days in October 2008 and March 2020.
But I’m not worried.
Oscillations like this are normal and overly exaggerated by the algorithms.
So, in today’s Market360, we’re going to take a look at some of the current concerns for the energy market… and I’ll share why I still think this is a great place to put our money in the current market environment.
Biden’s Plea to Big Oil
The Biden administration recently sent a letter to seven major oil companies, including Exxon Mobil Corporation (XOM), BP plc (BP), Shell plc (SHEL) and Valero Energy Corporation (VLO). The letter called for “immediate actions” to supply more fuel and said his administration was prepared to use “all reasonable and appropriate” tools help boost the fuel supply.
President Biden asked refiners to explain why they had shut down some plants that make fuel. The Biden administration argued that these closures have contributed to “an unprecedented discount between the price of oil and the price of gas.”
The letter from Biden concluded by saying, “But at a time of war, refinery profit margins well above normal being passed directly onto American families are not acceptable.”
The President of the American Petroleum Institute (API), Mike Sommers, said that the API welcome the opportunity to “open increased dialogue with the White House,” but then added that the Biden administration’s “misguided policy agenda shifting away from domestic oil and natural gas has compounded inflationary pressures and added headwinds.”
The API added that U.S. refineries were currently operating close to capacity and fuel production was near the top of the five-year range.
The Wall Street Journal subsequently had an excellent article about how high U.S. exports of refined fuels to Latin America and other markets have contributed to higher prices at the pump, especially diesel fuel, which the U.S. has been exporting for decades.
The truth of the matter is that a barrel of crude oil that is refined typically makes 19 gallons of gasoline, 12 gallons of diesel and other distillates, like kerosene, jet fuel and fuel oil. The U.S. refining industry has always made more diesel than it needs, so it has been exporting distillates like fuel oil and diesel to Latin America for decades.
Now the Biden administration is implying that these fuel exports are responsible for the higher prices at the pump, but this is extremely misleading.
In fact, the Biden administration’s new press secretary, Karine Jean-Pierre, recently said that the U.S. does not need to drill for more crude oil but merely to boost its refining output to lower the prices at the pump.
Then this week to try and curb the pinch at the pump, Biden suggested a gas tax holiday. If passed, it would drop the cost per gallon about 18 cents (24 cents for diesel)… but there is no guarantee that the saving will be passed on to the consumer.
The fact is folks, even with current spike in gas prices, demand hasn’t gone down… at least not yet.
And that’s great news for our energy stocks…
Oil and Energy Remain A Strong Buy
Here’s the reality: We’re swiftly coming up on the second-quarter earnings season, and the energy sector is shaping up to be the biggest winner. According to FactSet, the S&P 500 energy sector’s earnings are anticipated to increase 213.1% year-over-year. 18 of the 20 companies in the energy sector have seen an increase in their average earnings per share.
Right now, markets are anticipating lower oil demand, but the oil companies continue to boast strong operating margins, which is why I expect them to report record earnings in the coming quarter. Wall Street typically rewards companies that post strong earnings and sales results, so I fully expect energy companies’ stock to be dropkicked and driven higher in the wake of their better-than-expected earnings reports.
That’s why in this Friday’s Growth Investor Monthly Issue for July my Top 5 Stocks list is chock-full of energy stocks.
Now, I should also add that I expect all of my Growth Investor stocks to do well in the upcoming weeks. The fact of the matter is these stocks are characterized by 61.6% annual sales growth and 429.2% annual earnings growth yet are trading at only 8.5 times median forecasted earnings!
On top of my Top 5 Stocks list in this month’s issue, I am adding three exciting new stocks. These companies not only have strong forecasted earnings growth but have also benefited from positive analyst estimates and persistent institutional buying pressure.
I’m keenly aware of the rampant recession fears as the Treasury yield curve briefly inverted and the Fed, plus other central banks, has had to raise key interest rates, and that’s spooked investors.
But the fact is my Growth Investor stocks are poised to profit from all the inflation chaos, since we are loaded with energy, fertilizer, food, shipping and specialty semiconductor stocks. These stocks are an oasis for investors seeking steady sales and earnings growth.
As I said, I’m releasing three brand-new recommendations tomorrow that stand to do well in this inflationary environment.
The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owns the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below:
BP plc (BP), Shell plc (SHEL), Valero Energy Corporation (VLO)