Displaying items by tag: energy
Polls have Biden well ahead of President Trump at the moment. In fact, some pollsters say that Biden is further ahead leading up to election day than any candidate in the last 20 years. Markets have somewhat followed this and are clearly anticipating a Biden victory. That said, there is almost nobody who doesn’t think the race will be very close. So, how to play it if Trump surprises the markets and wins? Three sectors seem like they would benefit most strongly: traditional energy companies, defense companies, and large-cap banks. Trump’s light-touch regulatory approach would help energy companies and large banks, while defense spending would probably continue to rise under Trump.
FINSUM: Most agree that if Trump surprises, the market is not going to shoot higher like it did in 2016, primarily because there is not a big proposed tax cut.
When you think of oil, you don’t normally think of an industry that would gain from a big win by Democrats in an election. But as it happens, oil could very well gain if Democrats sweep the presidency and congress. The reason why is slightly perverse, but that makes it no less relevant. The concept is that Democrats would be bring new regulation around fracking; specifically, regulations that limit new drilling but allow existing projects. What this would mean is a steady rise in prices as inventory becomes constrained as the recovery proceeds. For example, Morgan Stanley is forecasting almost a 100% gain in natural gas prices next year.
FINSUM: Oil and gas are a physical supply and demand market, and if regulations keep supply in the ground, then prices will rise.
Because of how the polls are trending, very few seem to be thinking about the fact that a Republican sweep of all three chambers of the government could happen. When you step away from the polls and think about the fact that Republicans currently control two of the three chambers, it becomes more realistic; and even more so when you consider that polls are likely skewed towards Democrats because of “silent” Republican supporters. If the Republicans sweep, or even just if Trump wins, then the sectors that will surge are energy, banks, healthcare, and defense. In particular, think names like Marathon Petroleum, Bank of America, Pfizer, and Northrop Grumman.
FINSUM: This may be unlikely, but it is not as wildly unrealistic as some make it sound. Perhaps smart to have a portion of the portfolio in these sectors headed into the election?
This COVID crisis has made whole areas of the economy uninvestable. Many companies have had to halt operations entirely and as the lockdown drags on it has become more clear that many may not reach their previous levels for years (if ever). One problem is that many stocks and sectors appear to be “stubs”, or stocks that have very binary value propositions. Unless things go very right, they are worth almost nothing. Energy is a good example. If oil prices don’t come back and demand for oil stays low, what is the US oil sector worth? Big brock and mortar retailers are the same—what are they worth if the re-opening doesn’t go well?
FINSUM: This is a useful way to think about some sectors, but the outcomes are probably not as binary as they may seem right now.
The oil market has been the story of the week for markets. The price of black gold fell to -$37 dollars on Monday. The market would technically pay you to take oil off its hands. Even at $20, most of the US oil industry is out of business, so what can the President and the government do to save the market? There are several options. For instance, the government could buy a hundred million barrels of oil for its strategic reserve, or it could create new storage space. However, the option the markets favor is for the government to buy mountains of oil while it is still in the ground, and have producers pay them back as they extract it.
FINSUM: If the government wants to save the US oil industry from a mass bankruptcy—and resulting rupture in the high yield market—it will need to take action.