English: United States President Barack Obama signs into law the American Recovery and Reinvestment Act of 2009 as Vice President Joe Biden looks on. (Photo credit: Wikipedia)
By Guest Editor Eve Harding
Judging by the recent trading volumes observed in energy stocks, a bullish sentiment seems to have captivated traders and investors. This sector has faced some challenges in the last couple of years, particularly with regard to tension in the Middle East, disappointing news from solar power outfits, and oil prices that have not fully recovered from their record levels in 2008. Still, 2012 has been a good year for energy traders, and recent developments in this sector point to a bullish future for investors.
The first two weeks of September were very positive for investors following benchmark indicators such as China‘s CSI 300 Energy Index, as well as the NYSE Arca Oil Index. One of the highlights took place on Friday, September 21st with Chevron (NYSE:CVX). The bullish sentiment has been keen on this stock, and a brief run-up of crude oil prices helped the California-based company reach its all-time high of $118.53, before ticking down to close at $117.80.
Prior to Chevron’s strong performance on Friday, the NYSE Arca Oil Index had experienced a drop after two weeks of solid gains, particularly after the announcement by the United States Federal Reserve Board of that nation’s intention to engage in a third round of quantitative easing. Chairman Ben Bernanke‘s announcement was well-received by energy regulators in China, who approved their own version of a stimulus focused directly on massive infrastructure projects. These two interventions by two major central banks are expected to boost the prices of raw materials, commodities and energy around the world.
Just like the NYSE Arca Oil Index, the CSI Energy 300 posted gains in September, although the Arca Oil Index ended the third week of September lower due to earlier missteps by other oil service companies. This setback is a reminder to energy traders that the sector is still very vulnerable in terms of volatility, but the overall sentiment remains bullish.
Two Oil Stocks to Watch
Chevron is getting high marks from various analysts. Its record high on Friday was fueled by a report issued by J.P. Morgan Equity Research the day before. According to J.P. Morgan, Chevron’s performance merits a price target of $123 per share, a full $3 higher than previously estimated. Other analysts from Oppenheimer and Barclays essentially echoed the sentiment by J.P. Morgan.
Investors interested in Chevron may also want to consider Superior Energy Services (NYSE:SPN), an affordable providers of services to the oil and gas drilling industries. Recent share prices for Superior Energy have hovered around $24, but analysts from Williams Financial Group recently issued a price target of $30 based on recent acquisitions that will put the company in line with larger global competitors in the long-term.
An Active Exchange-Traded Fund (ETF) to Watch
The First Trust North American Energy Infrastructure ETF (NAR:EMLP) has been the most popular energy ETF this year according to a recent report published in Barron’s. Investors who are bullish on this ETF share some strong beliefs in a recovery of the American economy that will be fueled by the energy sector. This is not such a far-fetched position, considering the factors the U.S. needs for such a recovery to take place:
- Global demand for fuel should increase or otherwise stabilize.
- Oil service companies will have easy access to capital.
- The American energy infrastructure will continue to grow.
- Interests rates will remain low.
Of all the factors above, investors can take solace in the fact that the U.S. Federal Reserve has strong motivations for doing everything possible to keep interest rates low. That is one of the major motivations behind QE3, and that will make it easier for energy companies to borrow funds to finance their projects. Global demand for fuel cannot be seen as a guarantee, but the administration of President Barack Obama announced in August that seven energy infrastructure projects would be expedited in the U.S. These projects, however, are of the clean energy variety.
In the end, the long-term bullish trend on the energy sector may end up shifting its focus to other energy sources as stock brokers and investors continue to look for an edge. Oil is the most significant factor in the current bullish equation, but investors should keep in mind that China has a lot riding on coal production, while the U.S. is significantly stepping up domestic production of shale gas.