The energy market’s rebound in 2016 may follow-through with more upside this year. Last year, markets built the oil rally on anticipating both the OPEC and non-OPEC nations would agree on an output. The confirmed agreements set the stage for higher oil prices and limited supply, but there are risks.
Market participants will get no guarantee any of the energy-producing nations will limit output despite agreeing to it. For now, energy prices do not reflect any of this uncertainty. Exxon Mobil (XOM) ended the year up nearly 20% in 2016, while BP plc jumped 29% in the year. Natural gas producers like Chesapeake Energy (CHK) rose 56 percent. The deep-water drillers also closed higher for the year, led by Transocean (RIG), up 19% and Halliburton (HAL) up ~ 62%.
For the next few weeks, a lack of negative news will prevent stocks in the energy sector from falling. Anticipation of higher economic activity in the United States will offset the perpetual slowdown in China, lifting energy prices.
Takeaway
Investors who missed out on last year’s energy rebound should stick with large cap vertically integrated companies. BP and Exxon have the biggest cost advantage in oil production and are best positioned to withstand a drop in energy prices.
