The energy sector has topped the S&P 500 leaderboard for yet another month.
The sector's most popular benchmark, the Energy Select Sector SPDR ETF (NYSEARCA:XLE), climbed another 10% in October to bring its year-to-date gain to a market-beating 54.3% thanks to the oil price rally as well as stellar earnings.
A week ago, WTI crude oil climbed above $85/bbl for the first time since 2014, ahead of a key OPEC+ meeting on Thursday. Saudi Arabia's Energy Minister has told Bloomberg that oil producers should not take higher prices for granted, encouraging continued discipline among members.
"Continuous global stock drawdowns are still widely anticipated in the coming months and only a dent in demand growth could change the underlying sentiment," PVM Oil Associates analyst Tamas Varga has told Bloomberg.
However, oil prices have lately been retreating after the Energy Information Administration reported an inventory build of 4.3 million barrels for the week to October 22, way higher than expectations for a build of 1.65 million barrels. The surprise build compares with a modest draw of 400,000 barrels for the previous week.
The development has come smack in the middle of the earnings season, with the oil and gas sector managing to deliver another blowout quarter.
Stellar earnings
Nearly 60% of S&P 500 companies have reported third quarter 2021 earnings, and the energy sector has again emerged as a standout performer.
According to the latest FactSet data, the Energy sector is reporting the second-largest positive (aggregate) difference between actual earnings and estimated earnings (+15.9%), behind only the Financial sector.
Within this sector, Phillips 66 (NYSE:PSX) ($3.18 vs. $1.90), Chevron (NYSE:CVX)($2.96 vs. $2.20), and Valero Energy (NYSE:VLO)($1.22 vs. $0.92) have reported the largest positive EPS surprises.
The Energy sector is reporting earnings of $23.6 billion for Q3 2021 compared to a loss of -$1.5 billion in Q3 2020. Thus, a year-over-year growth rate is not being calculated for the Energy sector due to the loss reported by the sector in Q3 2020. Higher year-over-year oil prices are contributing to the year-over-year improvement in earnings for this sector, as the average price of oil in Q3 2021 ($70.52) was 72% above the average price for oil in Q3 2020 ($40.92).
At the sub-industry level, all five sub-industries in the sector are reporting a year-over-year increase in earnings. A growth rate is not being calculated for three of these five sub-industries due to losses reported in the year-ago quarter. However, all three are reporting profits in Q3 2021: Integrated Oil & Gas, Oil & Gas Exploration & Production, and Oil & Gas Refining & Marketing. The other two sub-industries that are reporting year-over-year growth are the Oil & Gas Equipment & Services (159%) and the Oil & Gas Storage & Transportation (11%) sub-industries.
At the company level, Exxon Mobil (NYSE:XOM) and Chevron are the largest contributors to the year-over-year improvement in earnings for the sector. Combined, these two companies account for $13.0 billion of the $25.1 billion year-over-year increase in earnings for the sector.
The Energy sector is reporting the highest (year-over-year) revenue growth rate of all eleven sectors at 61.5%. Higher year-over-year oil prices are contributing to the year-over-year improvement in revenues for this sector.
At the sub-industry level, all five sub-industries in the sector are reporting (or are projected to report) double-digit (year-over-year) growth in revenues: Oil & Gas Exploration & Production (122%), Integrated Oil & Gas (67%), Oil & Gas Refining & Marketing (49%), Oil & Gas Storage & Transportation (37%), and Oil & Gas Equipment & Services (11%).
Bullish outlook
Wall Street remains largely bullish on the long-term oil trajectory, with scores of analysts predicting even higher oil prices.
Craig Johnson, chief market strategist at Piper Sandler, says the oil price rally still has plenty of room to run.
"We're coming into the winter months and it looks like to me, from looking at an oil chart, we could see oil above the $90 level. It could be closer to $110 to $115," Johnson has told CNBC.
"The energy crunch is still nowhere close to subsiding, so we expect prevailing strength in oil prices in November and December as supply lags demand and as OPEC+ stays on the sidelines," Rystad Energy's Louise Dickson has told Reuters.
Earlier, Goldman Sachs, which had forecast Brent at $90, said the benchmark could even top that by the end of the year.
By Alex Kimani for Oilprice.com
