Energy companies in the shadow of corona virus and software

Energy companies in the shadow of corona virus and software

14 February 2020 from Mikael Syding

Energy companies in the shadow of corona virus and software

The 25% price fall from $ 71 to $ 53 per barrel of brent oil has taken many by surprise this winter. Weaker economy, doubts about the China-US trade agreement, and not least the corona virus are behind the rapid fall. The price of natural gas started falling as early as November and has now decreased by 40%. The question is when is it time to find bargains for the energy products and related companies in the energy sector. It is probably not quite the time yet but will probably take at least a few weeks before the news cycle regarding the economy and the corona virus has peaked. But when it's time, the upside compensates for the risk. One indication of the potential is that during the two upturn phases, prices for both fuel oil and natural gas rose by 25-30% on each occasion as late as autumn.

If you listen to the analysts on the Macro Voices and Real Vision platforms, in a few weeks we will reach about the same low prices as June 2017. Given the obviously manipulated information on the corona virus that China publishes, one could be inclined to agree that the negativity will increase for a while. before the sentiment turns for the better. Maybe it's already time to start gently accumulating energy shares, but be prepared to have to buy more on lower prices in a final capitulation movement downward.

One reason to start buying sooner rather than later is that “Value” performed extremely poorly in relation to “Tech” for 13 years, which is unusually long. Energy is still the most important product in the world, without energy everything grinds to a standstill. Therefore, it is likely that Value, which includes the energy sector, will make a comeback relatively to Tech and Growth in the coming decade. Just as gold is money and over time constitutes a certain proportion of the economy, so oil equals energy and also has a given proportion of the economy over time.

When strategies that have similar characteristics over very long periods of time have diverged sharply, it is often productive to switch from the one who has done well lately to the one that has performed poorly. This could mean that in 2020, a short-term tactical position could soon be taken in energy companies, and also during the year a more long-term strategic opportunity exists to switch from expensive technology companies to “Value”, such as oil companies.

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If the dollar strength continues, as part of a safety trade, for example due to concerns about the corona virus turning into a widespread pandemic, the oil price may yet fall significantly even from today's relatively low levels. Stronger dollar, less traveling and a weaker economy, as well as perhaps disagreement within OPEC, can work together to create a perfect storm for oil prices. Then maybe even the bottom of January 2016 at $ 27 per barrel of fuel oil can be challenged. Although everything is possible and we cannot currently assess the final economic consequences of the corona virus, it is still probably the most reasonable course of action to start accumulating long positions in oil, gas and related companies in the energy sector. However, the idea of first capturing a sizeable downside capitulation inspires, even though it is a high-risk trade.

Legal notice

This information is in the sole responsibility of the guest author and does not necessarily represent the opinion of Bank Vontobel Europe AG or any other company of the Vontobel Group. The further development of the index or a company as well as its share price depends on a large number of company-, group- and sector-specific as well as economic factors. When forming his investment decision, each investor must take into account the risk of price losses. Please note that investing in these products will not generate ongoing income.

The products are not capitalprotected, in the worst case a total loss of the invested capital is possible. In the event of insolvency of the issuer and the guarantor, the investor bears the risk of a total loss of his investment. In any case, investors should note that past performance and / or analysts' opinions are no adequate indicator of future performance. The performance of the underlyings depends on a variety of economic, entrepreneurial and political factors that should be taken into account in the formation of a market expectation.

03/04/2020 04:12:36

 

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