This November was a good one for the market. The S&P 500 logged an 11% gain for the now-ended month, reversing losses logged during October as well as September. In fact, all of the major indices recently hit record highs.
It would be short-sighted, however, to overlook the fact that energy stocks did more than their fair share of this heavy lifting. S&P 500 components Occidental Petroleum (NYSE:OXY), Devon Energy (NYSE:DVN), and Diamondback Energy (NASDAQ:FANG) were each up more than 70% in November, leading the sector's rebound from a rather rough October plunge. In fact, oil and gas stocks were more than ripe for a recovery this past month, having fallen nearly 40% from their June highs. The coronavirus pandemic really rattled the surprisingly sensitive energy market.
If you're thinking this rebound marks the beginning of a bigger-picture recovery for oil and gas names, though, you may want to reconsider. The underlying dynamics of the sector still aren't strong enough to get all of these companies meaningfully back in the black.
COVID-19 vaccines restore hope
Diamondback, Devon, and Occidental may have put up the biggest numbers, but by virtue of their bigger market caps, Chevron (NYSE:CVX) and ExxonMobil (NYSE:XOM) boasted the bigger bullish impact on the S&P 500. They were up 32% and 24%, respectively, in November. As for crude oil itself, March's short-lived low near $20 per barrel has since improved to $45.
The prod for at least the latter part of the month's gains was the prospect of an end to the coronavirus pandemic. On Nov. 9, Pfizer announced that its vaccine co-developed with BioNTech was effective, and just a few days later, Moderna reported its candidate was a similarly effective vaccine against SARS-CoV-2 infections. Even AstraZeneca's solution holds promise despite questions over the company's trial methodology. Surely one (or more) of them will finally get COVID-19 under control. That should ultimately help rekindle the need for gasoline and diesel fuel.
Then there's the simple fact that energy stocks (along with oil prices) were just beaten down so badly through October -- having failed to fully recover from the February-March plunge -- that there's plenty of room to recover.
It's still not enough, however, to start making big bets on long-lived rebounds of these stocks. As enticing as those gains are, they've not proven to have any real staying power.
Oil rebound not built to last
Yes, the energy sector's players may well enjoy higher oil prices from here. Keep things in perspective, though. Even if crude prices continue to march upward from their current price of $45 per barrel to as high as $55 per barrel, that's still only in line with 2019's lackluster levels. You may recall that even the industry titans like ExxonMobil and Occidental weren't exactly on fire that year, reporting per-share profits that were around half of 2018's, or less. Chevron and Devon Energy fared a little better, but only by virtue of not posting earnings drops as dramatic of those of their peers. None of these companies has done particularly well since 2014, in fact, when West Texas crude prices were around $100 per barrel.
And even an improved price of $55 per barrel may merely be a pipe dream. The U.S. Energy Information Administration's most recent outlook suggests the average price of crude in 2021 should be just a bit above $44 per barrel. That's more pessimistic than a recent price outlook from ExxonMobil, according to The Wall Street Journal, but not by leaps and bounds. The internal documents reviewed by the Journal indicate that as recently as this fall, ExxonMobil cut its crude price outlook for the next seven years by amounts ranging from 11% to 17%. That would put crude prices at somewhere between $55 and $60 per barrel...but only seven years from now.
In the meantime, while down from its record peak of 539 million barrels, hit in July of this year, the country's collective inventory of 488 million barrels is still roughly 100 million barrels more than in any year prior to 2015. This degree of supply works against oil prices that have climbed so quickly of late.
There's also the not-so-small matter that global consumption of crude has been leveling off for a couple years now, and should sink from 2019's peak daily consumption of 101.5 million barrels even during what should be a more normal 2021. OPEC's former head of research Hasan Qabazard told Reuters earlier this year that the COVID-19 pandemic was causing "permanent demand destruction" for the oil and gas industry, adding that it would likely take until the 2040s before a far more populated world would use even as much as 110 million barrels per day.
The answer for investors
None of this is to suggest oil and gas stocks won't experience the occasional moment of brilliance in the future. Oil prices are volatile in both directions.
However, the bigger-picture underpinnings of energy stocks' recent rally may or may not be built to last. As tough as it is to watch an entire industry slowly unravel, investors would be wise to start thinking about how the energy market is in the midst of a paradigm shift that disfavors fossil fuels. Change happens, even if driven by short-lived headwinds like a pandemic. Making this job even tougher is that it could take several more years for this reality to become crystal clear.
In the meantime, no: Neither Diamondback, Chevron, ExxonMobil, nor any of the other recently hot stocks are proven buys for anybody other than speculators, swing traders, and income investors who only care about reasonably reliable dividends.