Last week’s four-day trading week was an absolute boon for the stock market, with the S&P 500 rallying 6.5% and the Dow Jones Industrial Average tacking on a 5.4% gain. The NASDAQ Composite also roared back last week, climbing an impressive 7.5%.
Unfortunately, some stocks did not participate in the market’s rebound last week, namely energy stocks.
The reality is that weak economic news emanating from Europe, as well as all the talk about a potential recession here in the U.S., caused a mini “commodity crunch” last week.
Crude oil, copper and other commodity prices all declined. Even grain prices dipped briefly below their levels prior to the Russia-Ukraine conflict, despite the fact that Ukrainian wheat is not being shipped to its normal markets in Africa, Europe and the Middle East. Moderating commodity prices are a clear sign that inflation is cooling.
While we all want to see inflation moderate, the question remains, what does this recent action mean for energy stocks?
In today’s Market360, we’ll consider whether the oil market has peaked… and if there is still more room to profit in the energy sector.
Record Earnings Expected from Oil
While crude oil prices have dipped from $120 per barrel at the end of May to about $107 per barrel this week, gasoline prices remain elevated. The average price of gasoline in the U.S. has been around $5 per gallon, and some economists have even forecast that $6 per gallon isn’t out of the question as the summer driving season accelerates.
Americans are clearly frustrated with the elevated prices for gasoline, as the higher prices at the pump are now apparently impacting demand.
According to energy data provider OPIS, U.S. gasoline demand declined 8.2% in the latest week (ending on June 10) compared to a year ago. The Energy Information Agency (EIA) also estimates that oil consumption dropped by 110,000 barrels per day compared to the previous week.
Gasoline is widely viewed as a largely “inelastic” commodity where demand is slow to change. But oil consumption is changing right now. The EIA noted that the U.S. was using 9.4 million barrels per day at this time last year, while the U.S. is now using about 9.1 million barrels per day this year. Clearly, some consumers may be consolidating their trips and driving less. The real test, though, will be the upcoming July 4th holiday weekend.
In the meantime, crude oil and refinery companies are still expected to report record second-quarter earnings. As an example, Cenovus Energy (NYSE:CVE) is forecast to achieve 800% year-over-year earnings growth for its quarter.
Energy Stocks Still Have Room to Run
In my opinion, energy stocks still have room to run and will remain profitable even if crude oil falls to $90 per barrel after September, when seasonal demand naturally ebbs.
As I laid out last week, oil companies continue to boast strong operating margins, which is why I expect them to report record earnings in the coming quarter. Currently, FactSet expects the energy sector’s earnings to grow a whopping 215.4% year-over-year. This compares to initial estimates made on March 31 for earnings growth of 137.4%. For perspective, the S&P 500’s earnings growth rate is forecast to come in at 4.3%. 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.
I should also add that yesterday, as the market started falling apart after a strong open, energy stocks remained the bright green light in a sea of red.
So, I remain very bullish on energy stocks, and view the recent dip as a good buying opportunity.
That’s why in last Friday’s Growth Investor Monthly Issue for July my Top 5 Stocks list is chock-full of energy stocks.
I also added 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.
The bottom line: The energy bull has not run out of steam yet.
P.S. I recently sat down with Wall Street legend Whitney Tilson, who Wall Street has dubbed “The Prophet” for correctly predicting many market moves. Now, our investing approaches may be different, but there’s one thing we can agree on: Something big is happening on August 29, 2022, in downtown Houston, Texas, that could set in motion the biggest investment opportunity in three generations.
So, if you think the market has been shaken-up this year… you haven’t seen anything yet.
Whitney and I have been tracking this event for 40 years, and what you do on that day will forever define who saw it coming, and had their money first… and who missed it completely.
We’ll be making an exciting announcement about this event soon, so keep an eye on your inbox!
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:
Cenovus Energy, Inc. (CVE)