Yahoo Finanzen What Happens to Energy Investments if Oil Prices Don't Recover?
A rebound in crude oil prices lifted energy investments this year, with names of super-major oil producers like Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX) sporting double-digit gains so far in 2016 after sharp losses in 2015.
That also goes for the iShares iBoxx $ High Yield Corporate Bond exchange-traded fund (HYG), which many crude-oil market watchers use as a proxy for energy-debt investments since many energy companies operating in the shale-oil boom areas used high-yield debt for funding.
Crude oil prices are trading between $40 and $50 a barrel, well off the lows at the beginning of the year when West Texas Intermediate crude oil briefly traded below $30 a barrel because of excessive supply in the global markets. The imbalance between supply and demand remains, but has eased.
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Part of the recent strength in both crude oil prices and energy investments stemmed from expectations that supply and demand will come back into balance soon, meaning prices will rise above current levels. Cheaper prices increased U.S. demand, with the Department of Energy's Energy Information Administration, the agency's statistical arm, showing gasoline demand at a record so far this year.
But ominous clouds are on the horizon. The International Energy Agency says global oil demand growth is slowing at a faster pace than predicted and may continue to ease in 2017 because of uncertain underlying macroeconomic conditions.
If the supply-and-demand balance doesn't materialize as market watchers expected, it could hit energy investments, the agency says.
Rose-colored glasses. "There is a large amount of optimism in the markets," says Scott Roberts, co-head of the high yield team at Invesco Fixed Income in Atlanta. "There is a danger when everyone starts to think the same way because markets don't always behave the way everyone thinks."
There are three potential headwinds for crude oil, he says. First is if supply starts to pick up in a way market watchers aren't expecting, such as an easing of tensions in Nigeria or Libya, or if Iraqi oil production is greater than expected.
Second would be a decline in gasoline demand in any of the developed global regions.
Lastly, Roberts said, if the Federal Reserve's Federal Open Market Committee raises interest rates and causes the U.S. dollar to rise, that could also hit oil prices because oil is denominated in dollars and a higher greenback can weaken oil prices in other currencies.
Brian Andrew, chief investment officer for Johnson Financial Group in Milwaukee, says sluggish global growth makes a meaningful increase in energy demand unlikely. And, he says, given that energy equities have rallied so much since the beginning of the year, it's hard to make the argument that these are still cheap for someone with a short-term view.
Corporate earnings as a whole for the energy sector were worse than expected, he says, but that doesn't seem to be deterring investors who appear to be taking the attitude that things will get better from here.
"If we continue to have this imbalance between supply and demand, it's hard to see a significant increase in the commodity price," he says. "Therefore, it's hard to see a significant increase in earnings that would justify the rally we've had in prices since mid-February."
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OPEC meets soon. Things could change depending on the results of the late-September OPEC meeting. Any agreement to freeze production could support prices, but most analysts don't expect that to happen.
Matt Sallee, portfolio manager at Tortoise Capital Advisors in Leawood, Kansas, says OPEC overproduction has kept supply and demand from balancing and he thinks the market is starting to even out.
"For the time being, until the market starts to see evidence of inventory go down globally, we're stuck in this $40 to $50 range," he says. "Once there is strong evidence that inventory is coming down, we'll move north of $50."
Matthew Pasts, chief executive officer at BTS Asset Management in Lexington, Massachusetts, says it's "a bit of wishful thinking" that crude oil prices will get much higher by the end of the year.
However, he says, energy investments could be helped by fiscal policy, especially if calls for infrastructure investing by both presidential candidates come to fruition.
Also, if inflation expectations start to creep up, that can help oil and energy investments, too. Pasts pointed to signs that wages are starting to increase, which could help inflation expectations, although he said no one is expecting much higher inflation.
Pasts says he's not too concerned about how energy investments will fare at current oil prices. A decline in oil prices could be a concern, but he doesn't see that happening now.
Dan Heckman, national investment consultant for U.S. Bank Wealth Management in Kansas City, Missouri, says the bottom for oil prices has been reached but conditions aren't right for sharply higher values.
There could be plenty of wide market swings that energy investors may have to stomach before values rise. Heckman says many energy production companies laid off workers during the worst of the downturn and cut back on investments for future projects.
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"(This) may create a scenario out later in the decade, (causing) prices move out considerably higher than now," he says. "In this year we see a lid on energy prices."
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