Energy Stocks Have Rallied In 2021. Will It Last?

Shares in the energy patch took a beating in 2020, but this slice of US equity sectors has posted a strong rebound so far in 2021, based on a set of exchange-traded funds. Encouraging, but it’s unlikely that stocks in the conventional realm of energy are gearing up for an extended bull run.

Climate-change risk is gathering momentum, which is no trivial factor for conventional energy stocks. The business opportunities are brighter for alternative energy firms, but these shares have already surged and are arguably pricing in much of the good news for the foreseeable future.

Let’s start with conventional energy stocks, based on Energy Select Sector SPDR (XLE), which is dominated by the likes of old-school behemoths such as Exxon Mobil (XOM), Chevron (CVX), and Phillips 66 (PSX). Big oil’s prospects face substantial regulatory and market challenges in the years ahead, even though XLE has enjoyed a strong bounce year to date after shedding nearly 33% in 2020.

XLE’s 6.1% gain so far this year stands out against mixed results for the rest of the main US equity sectors, based on trading through yesterday’s close (Jan. 27). The pop is impressive on a relative basis, but keep in mind that XLE’s recent gains follow much bigger losses previously and so its 2021 leadership may be less about brighter prospects vs. the temporary effects of a dead-cat bounce.

Even before the coronavirus shock, traditional energy stocks faced an increasingly hostile environment as the green revolution unfolded. The arrival of the Biden administration in Washington is expected to accelerate that revolution. As a signal of priorities for energy policy in the years ahead, President Biden yesterday announced a pause in oil drilling on public lands.

The market and regulatory climate are significantly more favorable for various flavors of so-called alternative energy companies. But that’s old news from an investment perspective and much of the new order for energy shares are already pricing in a bullish future.

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