The Energy Sector Will Rebound In 2021

A Golden Cross In The Energy Sector

The energy sector has been under a lot of pressure in the last few years. What started with a virtually-unfixable oversupply problem soon accelerated into a price catastrophe due to COVID-19. The combined effects of rampant oversupply and rapidly deteriorating demand drove the spot price for oil down 65% to trade at an 18-year low. Ultimately, the problem is, or was rather, with earnings. The outlook for earnings among the world’s oil producers fell more than 100% and was not far off the reality. The S&P 500 Energy Sector (NYSEARCA:XLE) is on track for earnings to fall more than 100% in calendar 2020 but that is where the bad news ends.

The Bull Case For Oil

Now there is a developing bull-story in the oil fields that points to a rebound in 2021. Not only is the price for oil bottoming, but the outlook for prices is positive. The EIA predicts that high-supply and COVID-restricted demand will continue in 2021 but the pressures are in decline. To start, the economic reopening is well underway and will accelerate over the next two quarters. The vaccines are largely to blame for the acceleration, as they become more widespread so to will global economic activity.

At the same time, the EIA expects usage to come in-line with production and begin chipping away at the global inventory. In terms of pricing, the spot price for Brent and WTI is expected to rise from Q4 2020 to Q1 2021 and continue edging higher over the rest of 2021. The average price for Brent is expected to average $6 per barrel more than it did in 2020 or up 14%, and this figure is up by $5 from the prior short-term EIA analysis.

What this means for the oil producers is more volume at a higher price. While the jump in demand and pricing will not offset all of the earnings declines in 2020 it will be a substantial improvement. When it comes to the stock market the number one driver of price action is the outlook for earnings. With the outlook for energy sector earnings positive and on the rise, there is no reason not to expect the Energy stocks won’t rise with it.

 There Is A Golden Crossover In Energy

The Energy Sector started making headlines a week or so ago when the price chart of the XLE Energy Sector ETF threw off a Golden Cross. The Golden Cross is when the 50-day simple moving average crosses over the 200-day moving average from underneath. This signal is a sign of changing trends as it shows short-term bulls taking control of the market and the longer-term investors are letting them. Since then, price action has pulled back somewhat and it may pull back further but the longer-term outlook is very bullish.

A look at the chart of weekly prices shows a clear Double-Bottoming pattern but one that is yet to confirm. The bottoms are noteworthy because the second is higher than the first and shows a rising tide of support at what are extremely low levels. The most recent action has prices just above the 200-day moving average where support can be expected to come back into play. If the $37.50 level confirms as support a move back to $42 will likely follow. If price action continues to fall the next target for support is near $36. In either case, once the Double-Bottom confirms with a new high the odds for a move to the $60 range become very high.

Another Catalyst For Energy Stocks: Dividends And Buybacks

While not all of the oil companies have had to cut or suspend their dividends and buybacks most have. And that is setting up another catalyst for the sector. As revenue and earnings improve over the coming quarters those value-returning actions that investors love so much will come back on the table. When they do the market will come flooding back into the sector.