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Fuel-Shortage Risks Make Investors Bullish on Energy Stocks

The energy sector is one of the rare bright spots in the world’s equity markets; an index of energy companies in the S&P 500 has rallied more than 40% so far this year.

By Nour Al Ali & Grant Smith | September 12, 2022 at 12:06 PM
Photo: Workers engage in the liquefied natural gas (LNG) ship-to-ship operation at Fauji Oil Terminal & Distribution Co. Ltd. in Karachi, Pakistan, on June 24, 2022. Workers engage in the liquefied natural gas (LNG) ship-to-ship operation at Fauji Oil Terminal & Distribution Co. Ltd. in Karachi, Pakistan, on June 24, 2022.

Energy stocks and bonds are poised to get a fresh boost from investors positioning to benefit from the surging electricity prices and fuel shortages expected later this year.

Two-thirds of respondents to an MLIV Pulse survey—which includes portfolio managers and retail investors—plan to increase exposure to the sector over the next six months. They see electricity and natural gas prices driving global inflation and expect that Russia will choke off flows of natural gas to Europe, leading to shortages of key fuels this winter.

Energy stocks are one of the rare bright spots in the world’s equity markets, with an index of energy companies in the S&P 500 rallying by more than 40 percent so far this year as profits surged along with oil and gas prices. Yet they remain significantly cheaper than their S&P 500 peers based on their prices relative to the earnings they’re expected to report in the year ahead. While junk-rated energy bonds are expensive compared with the global index, the U.S. energy debt rated at investment grade BBB is relatively attractive, trading at a higher spread than the average of its peers by rating and duration.

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