US energy groups soar after Opec agreement

November 30, 2016

The shares of US energy groups soared on Wednesday, emerging as early winners from Opec’s pact to curb production for the first time since the 2008 financial crisis.

Investors’ buoyant reaction underscored the dilemma that members of the Opec cartel faced ahead of their meeting this week in Vienna: by capping supply and driving up oil prices, they risked reinvigorating competitors in Texas, North Dakota and other US shale oil regions.

After the cartel agreed to curtail output by 1.2m barrels a day next year, the S&P 500 energy sector index on Wednesday rallied 4.8 per cent — its biggest gain in 15 months. Opec’s agreement marked an about-face from its hands-off approach to the oil market since 2014.

Independent oil and gas producers whose revenues are particularly sensitive to the price of oil were among the biggest gainers. Marathon Oil soared 20.8 per cent to $18.06, Newfield Exploration jumped 15.7 per cent to $45.22 and EOG Resources, among the biggest of the shale companies, rose 10.9 per cent to $102.52.

“In response to the Opec cut, we would expect the US onshore producers to be beneficiaries,” Barclays said.

ExxonMobil and Chevron, the largest American oil companies, climbed about 2 per cent each, to $87.30 and $111.56, respectively.

Shares in smaller energy groups notched even sharper gains, with the Russell 2000 energy index surging 12.2 per cent. California Resources, which focuses on energy exploration and production in the US state, jumped 44.4 per cent to $17.40.

Brent crude, the international oil marker, rose 8.8 per cent to $50.47 a barrel.

US energy companies have also been boosted by Donald Trump’s surprise win in the November 8 US presidential election amid expectations that the billionaire property developer will cut regulations affecting the sector.

The “increased emphasis on deregulation . . . could help unlock value, especially within energy pipelines and exploration and production”, noted Dubravko Lakos-Bujas, a strategist at JPMorgan who holds an “overweight” rating on the sector.

The strong run for the S&P 500 energy sector, up 21.5 per cent year-to-date and the best performer on the benchmark index, represents a stark turn of direction from earlier in the year.

The energy index was down as much as 13.3 per cent for 2016 in late January, as the price of Brent crude tumbled as low as $27.10 a barrel as concerns swirled about high supplies and cooling demand.

Investors worried at the time that the steep fall in the price of oil would deal an even deeper blow to the profits of energy groups and endanger their ability to pay back debt.

That fear has, however, eased considerably. For instance, the risk premium investors demand to hold the debt of the lowest-rated US energy companies over haven assets has plummeted to 5.6 percentage points above Treasuries of the same duration from as high as 19.7 percentage points in mid-February, data from Bank of America Merrill Lynch show.

Looking at the broader US equities market, financials, materials and industrial shares, sectors considered to be sensitive to economic fluctuations, rose on Wednesday on the back of upbeat data on the economy.

Defensive sectors, favoured for their consistent dividend streams, fell, with utilities dropping 3.2 per cent and telecommunications dipping 2.1 per cent.

The S&P 500 slipped 0.3 per cent to 2,198.8, the Dow Jones Industrial Average was little changed at 19,123.6 and the Nasdaq Composite declined 1.1 per cent to 5,323.7.

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