Stock investors are poised to miss out on soaring oil prices with energy only making up 2% of portfolios, BofA says

FILE PHOTO: A section of the BP Eastern Trough Area Project (ETAP) oil platform is seen in the North Sea, around 100 miles east of Aberdeen in Scotland, Britain, February 24, 2014.    REUTERS/Andy Buchanan/Pool/File Photo
An oil platform stands in the North Sea in Scotland.

  • The energy sector has a low weighting in most long-only investment portfolios, according to Bank of America.
  • Low exposure to energy will mean many investors will lose out on potential gains to be made as oil prices rise.
  • The energy sector is up about 45% this year compared with the S&P 500’s roughly 13% gain.
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Oil prices are primed to push higher in the near term but many investors may miss out on building wealth from those moves because most portfolios have very low exposure to the energy sector, according to Bank of America.

Supply constraints and growing demand for oil as coronavirus vaccinations allow more people to return to work and travel are factors that will contribute to drawing up the commodity’s value and build on price gains of at least 40% this year for both Brent crude and West Texas Intermediate crude.

The impact of the upside risk, however, may bypass numerous investors as the energy sector has 2% of an average long-only portfolio manager’s weight. This “paltry” level is about half as much as the 4.2% exposure to tech-behemoth Facebook, said Savita Subramanian, head of US equity strategy and quantitative strategy at BofA Securities, in a note published Thursday.

“Not owning Energy wasn’t painful when the sector was <2% of the S&P 500,” she wrote. “But the astronomic 92% price return since October has bumped Energy’s weight to 3%; another big move in oil may be felt more acutely.”

The energy sector collapsed in 2020, losing nearly 40% as oil prices briefly dropped into negative territory in a market rocked by a plunge in demand due to the coronavirus pandemic. The sector, along with oil prices, managed to dig out of the red in part as OPEC and its allies cut production to address the buildup in oil stockpiles.

The energy sector this year has gained 45% compared with the S&P 500 index’s nearly 13% rise to record highs. Brent crude and WTI prices over the past 12 months have run up by nearly 90% and 95%, respectively, leaving Brent to fetch more than $72 a barrel, and WTI to trade above $70 a barrel.

“If Energy doubled again, and all other sectors saw average returns, investors with no Energy exposure would sacrifice a full 3 percentage points of alpha,” or returns above a compatible benchmark index, wrote Subramanian. Losing out on 3% would more than obliterate relative gains of 0.59% this year, she said.

Meanwhile, ESG funds centered on environmental, social, and governance issues such as clean energy stand to underperform even more given their 70% underweight in the sector, said the strategist.

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US stocks rise after jobs data shows labor market strengthening after disappointing April report

Stock trader
Peter Tuchman, right, works among fellow traders at a post on the floor of the New York Stock Exchange, Wednesday, March 4, 2020.

  • US stocks rose Friday on the latest jobs data that indicate a strengthening labor market, though at a slower pace than analysts were predicting.
  • “The economy is still far from showing substantial progress with the labor market recovery,” an analyst said.
  • The 10-year US Treasury yields slightly fell to 1.604% compared with Thursday’s 1.624%.
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US stocks rose Friday as investors cheered May jobs data that indicated a strengthening labor market after a disappointing April reading.

Non-farm payrolls showed the US economy added 559,000 jobs in May, the Bureau of Labor Statistics said Friday. However, that was slightly lower than the 674,000 median estimate economists surveyed by Bloomberg were predicting.

“The May nonfarm payroll report showed that the economy is still far from showing substantial progress with the labor market recovery,” Ed Moya, senior market analyst at Oanda, said in a note.

He continued: “Labor market hiring remains modest at best and this should support a complete labor market recovery for the Fed at some point between the end of 2022 and early 2023.”

The reading shows a sharp acceleration from April’s dismal report, which saw job growth land well below economist forecasts. The May increase marks a fifth straight month of job additions.

In the bond market, the 10-year US Treasury yields slightly fell to 1.604% compared with Thursday’s 1.624%.

US stocks closed mostly lower Thursday as investors mulled over a new report that President Joe Biden may be open to a lower tax hike for corporations. Mega-cap tech stocks led losses, with Apple, Google, Facebook, and Amazon all down at least 1% Thursday. Tesla fell as much as 5%.

Here’s where US indexes stood at the 9:30 a.m. ET open on Friday:

AMC Entertainment has asked shareholders to let it issue another 25 million shares in the wake of the stock’s 2,300% rally, saying it will fortify the movie-theater chain with the means to chase acquisitions “hard” and turn itself around. The company CEO Adam Aron revealed this in a YouTube interview with Trey’s Trades Thursday night.

Meanwhile, billionaire investor Bill Ackman confirmed that his blank check company, Pershing Square Tontine Holdings, is in talks to spend about $4 billion for a 10% stake in Universal Music Group. He also unveiled plans to launch a new investment vehicle and deploy up to $14 billion on future transactions.

In cryptocurrencies, bitcoin slipped as much as 8% after Elon Musk signaled a potential breakup with the digital asset by posting a broken-heart emoji and a reference to a popular Linkin Park song. Bitcoin has fallen more than 40% since its April record high of near $65,000.

West Texas Intermediate crude was up 0.60%, to $69.22 per barrel. Brent crude, oil’s international benchmark, was also up 0.52%, to $71.68 per barrel,

Gold was down 1.9% to $1873.70 an ounce.

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US oil and natural gas prices rise as freezing temperatures leave millions without power in Texas

GettyImages 1231190311
Temperatures have plunged in Texas, causing energy prices to spike

US oil and natural gas prices rose on Tuesday, as freezing cold weather battered Texas’s energy infrastructure, leaving millions without power.

WTI crude oil was up 0.52% to $59.77 per barrel as of 6.10am ET. That was just off a more than one-year high of more than $60.80 touched on Monday as plunging temperatures hit Texan oil plants.

Natural gas futures were up 5.8% to $3.079 per million British thermal units on Tuesday, trading at around the highest levels since November.

More than 3 million people have been left without power in Texas and close to 5 million around the US as a whole, according to poweroutage.us, as a rare winter storm sweeps the country.

Temperatures fell to 4F (-16C) overnight in Dallas, Texas, and have plunged across Oklahoma, Kansas, New Mexico, Colorado and elsewhere.

It has been challenging for Texas’s energy grid, which does not pay generators to keep capacity in reserve. The weather has forced many generators to stop production.

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Wholesale energy prices have skyrocketed, at times above the market cap of $9,000 per megawatt hour, compared to prices of around $25 to $50 per MWh before the winter storms.

The frigid temperatures have hit oil production and natural gas supplies and led to a surge in demand for energy, causing prices to spike.

Heating oil futures – a proxy for diesel – were up 2.58% to $1.817 per gallon on Tuesday morning. Gasoline futures were up 4.11% to $1.7621 a gallon.

Texas is also home to some of the country’s biggest oil refineries, as well as the heart of the shale basin. 

Jeffrey Halley, senior market analyst at currency firm Oanda, said he thought the US oil market had been due a correction after a surge in prices in recent weeks. But he said the current weather situation “will likely continue to offset that.”

Read More: GOLDMAN SACHS: These 40 heavily shorted stocks could be the next GameStop if retail traders target them – and the group has already nearly doubled over the past 3 months

“Until the weather moderates in the United States… oil is a ‘buy on dips’ in the short-term.”

Brent crude oil, the international benchmark, was down 0.33% to $63.11 a barrel, still around a one-year high.

JPMorgan last week predicted a commodities “supercycle” would take hold in 2021, as economies reopen and drive up production and demand for energy.

The “roaring 20s” will be accompanied by easy monetary and fiscal policy, a weak US dollar and stronger inflation, all supportive for commodity prices, JPMorgan said.

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