Energy is now outperforming but ‘is no longer a buy-and-hold sector,’ trader says

Energy

Last year’s worst is now this year’s best.

Energy is the top-performing sector now, up nearly 15% since Jan. 1 amid falling U.S. crude oil inventories. The group suffered a horrible 2020, losing over 37%.

Though energy’s long-term outlook is dimming, the sector isn’t void of opportunity, Mark Tepper, president and CEO of Strategic Wealth Partners, told CNBC’s “Trading Nation” on Tuesday.

“This is a very tricky sector,” Tepper said. “In my opinion, I think this is no longer a buy-and-hold sector. It’s more of a trade. I don’t care what time frame you use — three years, five years, 10 years — the energy sector has been underperforming the S&P over any of those time frames by double digits annualized.”

That should continue as clean energy adoption accelerates, but in the meantime, there appears to be one potentially valuable trade in the making, Tepper said.

“Here’s the opportunity: Oil has found support. Unfortunately, it’s because of a reduction in supply rather than an increase in demand. Oil’s down about 3% now year over year whereas energy stocks are down about 30% year over year. So, there’s definitely the possibility of a catch-up,” he said.

“My favorite play here is Diamondback,” Tepper added. “It’s a pure play on the Permian [Basin]. It’s down about 30% year over year. They’re a low-cost producer. They’re one of the few companies that can actually make money if oil were to drop back down to the $30-40 range. And it’s got a pretty decent dividend as well.”

West Texas Intermediate crude oil prices were below $53 on Wednesday.

With demand falling and the Covid pandemic backing up inventories, Chantico Global founder and CEO Gina Sanchez also anticipated longer-term softness in oil prices.

“The estimates are that we’re probably going to recoup about two-thirds of that demand, and that’s good, except that we went into Covid with already a massive inventory of excess supply of oil, and during Covid, guess what? Those inventories grew,” she said in the same interview.

“It is going to take us about a year to burn off the excess supply that we have sitting in inventory right now before we can actually see support to oil prices,” said Sanchez, also chief market strategist at Lido Advisors.

For now, Sanchez is steering clear, noting that while demand might recover, it may not be enough to offset industry shifts years in the making.

“We’ve got a lot of oil to work through before we’re actually running any kind of a shortage, and so, prices are probably going to be somewhat soft,” Sanchez said. “The long-term trend, as Mark said, … has been down. We have seen technological innovation in oil that’s been driving down prices for a decade. So, I think it’s a challenge. I think the rotation into clean energy is probably the play for the next many years.”

Disclosure: Tepper and Strategic Wealth partners own shares of Diamondback Energy.

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