The S&P/ASX 200 Index (ASX: XJO) is having one of those whipsawing kind of days. At the time of writing, the index is essentially flat, up a rather insignificant 0.11% to 6,686 points, despite having dropped around 0.3% around lunchtime.
But one sector is not sharing in this commitment to neutrality. ASX energy shares are on fire today, and are dominating the ASX 200 best performers list.
Oil Search Ltd (ASX: OSH) is leading the charge – its shares are up a healthy 6.70% at the time of writing to $4.46 a share. The ASX’s biggest energy company – Woodside Petroleum Limited (ASX: WPL) – is also basking in the light of a 5.49% rise to $26.71 a share. Beach Energy Ltd (ASX: BPT) is up 4.69% to $2.01 a share.
So why this strident outperformance today? Well, there’s a couple of reasons we might be seeing this trend.
Black gold once more
The first, and most likely factor, is the price of crude oil itself. According to Bloomberg, the price of Brent crude oil is currently trading above US$57 a barrel. Around the start of the year, it was fetching roughly US$51 a barrel, meaning that we have seen a significant spike of approximately 12% in just a few days. Since oil companies’ costs of extracting a barrel of oil out of the ground are relatively fixed, rises like this tend to flow straight to these companies’ bottom lines.
Remember, these energy companies are also coming off of some very low bases. Take Oil Search. It was fetching almost $8 a share this time last year. But when the coronavirus pandemic hit, Oil Search shares plunged to levels unseen for 15 years. Even after today’s hefty rise, the Oil Search share price remains more than 40% lower than 12 months ago. We see similar patterns for the other energy shares like Woodside.
Energy companies are highly cyclical, and these moves prove it. Anyone who managed to correctly time these moves would have benefitted enormously though. Although Oil Search remains well-down from the highs we’ve just discussed, it’s also up around 144% since 23 March last year.
Another possible reason behind this stellar performance from the energy sector today is the increasing bullishness of investors with regard to the global economy. Earlier today, we discussed how some commentators are expecting a fantastic year in 2021 in terms of global growth, including a projection that the US economy is set to grow by 5.9% in 2021. We also discussed how this could lead to inflationary pressures. Energy prices (and companies) tend to perform well in an environment of global growth, and even better in an inflationary one. It’s possible that some investors are pricing these scenarios in as well.
Is it too late to buy into ASX energy shares?
With gains like these, some investors might be wondering if it’s too late to get a piece of the action. Well, one broker doesn’t think so. Goldman Sachs currently has ‘buy’ ratings on both Oil Search and Woodside, with price targets of $5.55 and $31 a share, respectively.
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Returns as of 6th October 2020
Motley Fool contributor Sebastian Bowen 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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