Are ASX energy shares the best pandemic recovery play in 2021?

Heading into 2021, all eyes are on the ‘recovery trade’. Could these 2 ASX energy shares be big gainers from a global reopening?

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Share price outlook a man raise his arms to the sun as it rises with the year 2021 in the background, indicating a bright future on the ASX share market

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We’re not out of the global pandemic woods just yet.

But with Moderna Inc‘s (NASDAQ: MRNA) vaccine given the green light by United States’ regulators, it could gain emergency authorisation clearance within days.

That will see Moderna’s vaccine join the jab developed by Pfizer Inc. (NYSE: PFE) and BioNTech SE (NASDAQ: BNTX). And it will give the world 2 highly effective vaccines in the last month of the same year that spawned the coronavirus outbreak.

Of course, it will still be many months before those vaccines, and others, are delivered to the billions of people waiting to be immunised. The Australian government is now forecasting its vaccine rollout will commence in February.

But with the light at the end of the COVID tunnel growing steadily brighter, investors are increasingly looking ahead to which shares are likely to see the biggest gains as the world reopens.

“The cheapest of all reflation assets”

According to Amrita Sen, co-founder of London-based consultant Energy Aspects Ltd (as quoted by Bloomberg): “Oil is the cheapest of all reflation assets. With vaccines slowly rolling out, we expect investors to start returning to the oil sector and for prices to continue firming.”

Indeed, optimism on the eventual lifting of global travel restrictions has seen Brent crude oil hit US$50.75 (AU$67.20) per barrel at time of writing. That’s the highest price for the international crude benchmark since 4 March. And it’s up 163% from the 21 March low of US$19.33 per barrel.

Here’s more, from Bloomberg:

The enormous glut of fuel that accumulated this year on everything from tiny barges to giant supertankers is being steadily depleted…  In a world that’s expecting to see travel recover sharply next year, crude has become a hot Covid-vaccine trade.

Not that oil and gas demand is ramping up everywhere in the world just yet.

With new infections surging, a number of European nations introduced strict lockdown measures this week, set to last through mid to end of January. And travel restrictions in some US states are also forecast to impact short-term petrol demand.

Meanwhile, petrol consumption has returned to or even exceeded late 2019 levels in Japan and China. China consumes the world’s second largest amount of oil (behind the US), while Japan is the fourth largest consumer. And in the world’s second most populous nation, India, its largest refiner reported that its back to processing at full capacity.

Brace for setbacks

With the positive mid to longer-term outlook outlined above, investors in energy shares should be prepared for a bumpy ride. Particularly in the first half of 2020.

Bart Melek, the head of global commodity strategy at TD Securities, cautions about the impact of the ‘second wave’ (quoted by Bloomberg):

Oil’s reacting to pretty significant increases in risk appetite. But with the second wave probably continuing to damage demand growth and inventories likely staying at somewhat elevated levels, the market is having second thoughts about going materially higher.

Stewart Glickman, energy equity analyst at CFRA Research points out that oil demand won’t rocket overnight:

People are forgetting that there’s a couple of triggers that have to happen before oil demand really comes back. The first half of the year we’re going to see some resurgence of weakness in oil demand, because it’s going to take time before everybody feels comfortable enough for things to start reopening fully.

Victor Shum, vice president of energy consulting at IHS Markit Ltd. in Singapore adds, “Right now, oil has priced in that promising future. While we have to deal with the immediate dark COVID winter.”

Despite the spectre that a dark COVID winter is coming, long-term investors appear to be looking beyond that gloom to a time when vehicles, planes and boats will again move freely across state and international borders. As witnessed by the data from JPMorgan Chase & Co, indicating that energy contract holdings soared by US$3.6 billion through early December.

Aussie gas piggybacks on rising crude prices

And it’s not just crude oil prices rebounding to early March levels.

As the Australian Financial Review reports:

Prices for LNG – Australia’s second most valuable export – also rose at the end of last week, with demand due to the northern hemisphere winter pushing prices in Asia to their highest level in more than two years, according to Refinitiv.

Citing trade sources, the average LNG price for January delivery into north-east Asia was estimated about $US11.10 per million British thermal units, Refinitiv said, up $US3 on the prior week, or 37 per cent.

Two ASX energy shares closely tied to the price of oil and gas

The ASX has no shortage of oil and gas shares.

You’ll find the largest listed on the S&P/ASX 200 Index (ASX: XJO).

With a market cap of near $22 billion, Woodside Petroleum Limited (ASX: WPL) is Australia’s largest oil and gas producer. It also pays an annualised dividend yield of 5.1%, fully franked.

As you’d expect, Woodside’s share price took a beating when crude prices crashed. Shares tumbled more than 57% from late January through to mid-March. Since the first trading day of November, however, shares have leapt 31% higher. Year-to-date, Woodside’s share price remains down 33%.

Then there’s Santos Ltd (ASX: STO). One of the leading independent oil and gas producers in the Asia-Pacific region, Santos has a market cap of roughly $13.3 billion and pays an annualised dividend yield of 1.6%, fully franked.

Santos’ CEO Kevin Gallagher, for one, has no doubt that the demand for fossil fuels isn’t going away anytime soon, saying, “Electrification will grow, it may grow to 35 per cent but it ain’t going to go to 50 or 70 or 80 per cent. The world is going to need fuels for a very, very long time.”

Despite a 132% surge since 19 March, the Santos share price remains down 22% year-to-date.

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Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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