A Stock Trader’s Guide to Navigating the Global Energy Crisis

(Bloomberg) – The global energy crisis is escalating, hammering the stocks of companies that use a lot of electricity and causing the stocks of those that produce it to skyrocket.

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The economic recovery from the pandemic boosted demand for gas and coal, but their supplies could not keep up. With the northern hemisphere winter on the horizon and China – the world’s largest user of electricity – ordering state-owned energy companies to secure supply at all costs, investors are in a race to pick winners and losers.

A key measure from international energy producers, led by names such as Cabot Oil & Gas Corp. and ConocoPhillips, rose nearly 10% over the past month. Utilities stocks reversed, erasing this year’s gains, with materials companies joining among the biggest laggards in the MSCI World Index.

“The energy crisis may exist for the next few years. I think a super energy cycle has started and will continue for several years, ”said Sumeet Rohra, fund manager at Smartsun Capital Pte. in Singapore. “Energy stocks are very well positioned to generate big returns. “

China’s industrial sector contracted in September for the first time since the start of the pandemic, thanks to power cuts that affected regions accounting for more than two-thirds of the country’s gross domestic product. The energy crisis has also reportedly halted production at suppliers to global tech giants such as Apple Inc. and Tesla Inc.

Meanwhile, European natural gas stocks are dwindling as economies emerge from the pandemic shutdown and the White House has expressed concern over rising oil prices.

Here is a guide to the development of the stock market crisis:

Energy producers

Companies that produce gas, oil and coal should continue to benefit as winter approaches and demand increases.

Royal Dutch Shell Plc, TotalEnergies SE, Eni SpA and BP Plc are among the big European names that could continue to rally. In Asia, traders are keeping their eyes on companies like Woodside Petroleum Ltd., Petronas Gas Bhd., Inpex Corp., Oil and Natural Gas Corp. and Reliance Industries Ltd.

“It is not just an imbalance between supply and demand in the short term,” said Gary Dugan, managing director of the Global CIO Office. “The energy crisis is of great concern as it leads to the worst-case scenario for the markets – that of stagflation,” he said, referring to a situation in which economic growth stagnates while inflation and unemployment increase.

If the current tightening in the gas market continues into the next year, Total could see its 2022 profits increase by 18% and Eni by 12%, analysts at Goldman Sachs Group Inc., including Lilia Peytavin, wrote in a note in the week. last.

Bloomberg Intelligence analyst Talon Custer said U.S. exporters of liquefied natural gas, such as Cheniere Energy Inc. and Sempra Energy, appear well positioned in an LNG market that is expected to remain extremely tight over the winter.

Exxon Mobil Corp. said on September 30 that high gas prices would increase its third-quarter profit by about $ 700 million.

A three-year record high in oil prices is also helping Exxon and is expected to keep other companies such as Schlumberger Ltd., ConocoPhillips and Halliburton Co. on the radar of traders.

In contrast, gas distributors such as China Gas Holdings Ltd., Hong Kong and China Gas Co., Kunlun Energy Co and Indraprastha Gas Ltd. could be under pressure on margins if they are not allowed to pass on higher input costs.

In the midst of soaring coal prices, key stocks to watch are Arch Resources Inc. and Peabody Energy Corp. in the United States, Glencore Plc. in Europe, and China Shenhua Energy Co., China Coal Energy Co., Adaro Energy Tbk, Whitehaven Coal Ltd. as well as Coal India Ltd. in Asia.

Materials & Metals

While rising electricity prices hurt all users, they are particularly acute for energy-intensive materials and metals companies.

In Asia, these stocks include Aluminum Corporation of China Ltd., Baoshan Iron & Steel Co., Angang Steel Co., China National Chemical Engineering Co. and Zhejiang Longsheng Group Co.

European building materials manufacturer Sika AG also fits into the mold, as does steelmaker ArcelorMittal and cement producer Holcim Ltd. In the United States, steel producer Nucor Corp. and paint maker Sherwin-Williams Co. could be targeted.

Analysts at Bank of America Corp. see headwinds in input costs for Indian cement companies such as UltraTech Cement, Shree Cement Ltd. and companies in the paint industry.

Electricity utilities

Many government-backed electricity providers are likely to face pressure on margins, while those that are less regulated or independent have a better chance of benefiting from higher electricity prices.

Barclays Plc. Analysts, including Peter Crampton, expect a further rise in electricity prices to create winners in a less heavily regulated Northern Europe. They identified Électricité de France, Engie SA, Fortum Oyj and RWE AG. Analysts expect big improvements in earnings per share, especially for EDF, and have raised their estimates for 2021 and 2022 by 82% and 61%, respectively.

So far, the most visible signs of market distress have been seen in heavily regulated utilities in southern Europe. Iberdrola SA and Endesa SA shares are both trading at their lowest level for more than last year.

In Asia, the potential losers are Korea Electric Power Co., Tokyo Electric Power Co. and India’s NTPC Ltd. In the United States, companies like Southern Co., American Electric Power Co., and Duke Energy Corp. could come under pressure.

Green actions

Rising energy prices and efforts to reduce carbon emissions are also affecting the prices of renewable energy and nuclear stocks.

Laurent Douillet of Bloomberg Intelligence sees large nuclear and hydroelectric companies as potential winners over those dependent on gas and coal.

READ: China’s energy crisis pushes coal stocks and renewable energy companies up

The main stocks to watch are European companies Scatec ASA, Azelio AB and Orsted A / S, North American companies First Solar Inc. and SolarEdge Technologies Inc., and Asian companies LONGi Green Energy Co., Trina Solar Co., Sungrow Power Supply Co. and Adani Green. Energy Ltd.

“There hasn’t been a confluence of so many factors at the same time in the energy and commodities markets since at least the 1980s,” said Robert Ryan, chief commodities and marketing strategist. energy at BCA Research.

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