• Investing & Markets

Keeping an Eye on the Energy Market

April 20, 2018 | Brendan Erne, CFA

Earnings season is in full swing, with numerous banks reporting a strong uptick in bottom-line growth, driven almost entirely by the new tax changes. Other results were mixed, with negative surprises from Proctor & Gamble and Philip Morris, and positive surprises from the likes of GE and Netflix. Overall stocks gave back most of their gains from early in the week, but were still able to end in positive territory by Friday’s close.

Weekly Returns:

S&P 500: 2,666 (+0.4%)
FTSE All-World ex-US (VEU): (+0.2%)
US 10 Year Treasury Yield: 2.96% (+0.14%)
Gold: $1,336 (+0.2%)
EUR/USD: $1.229 (-0.4%)

Major Event

  • Monday – Netflix reported stronger-than-expected first-quarter growth, adding 7.41 million new subscribers globally.
  • Tuesday – Goldman Sachs reported a double-digit jump in earnings, driven primarily by lower corporate tax rates—a trend echoed by multiple banks throughout the week.
  • Wednesday – French energy giant Total announced it would acquire Direct Energie for $1.7 billion as it attempts to diversify into the electric utilities market.
  • Thursday – Shares of Philip Morris fell more than 15% after the firm announced declining cigarette volumes, and slower growth for its cigarette alternatives.
  • Friday – Wells Fargo agreed to pay a $1 billion fine to settle claims of misconduct brought on by federal regulators.
  • Friday – The Democratic National Committee filed a lawsuit against the Trump campaign, Russian government, and WikiLeaks, alleging interference in the 2016 election.

Our Take

The energy market has been an interesting one to watch. Oil prices have enjoyed a healthy rally this year, driven primarily by a 2016 pact between Saudi Arabia and Russia to cut production. This, coupled with strong global demand and geopolitical tensions, helped whittle away the glut of inventory that drove prices sharply lower in early 2016. The rally even sparked a Friday morning tweet from President Trump, criticizing the deal and claiming oil prices are “artificially very high.” The big question is whether this pact can continue.

Both Saudi Arabia and Russia are discussing future plans. Reports indicate Saudi Arabia needs the price of oil to remain above $70 a barrel, while Russia only needs prices above $53. So, it remains to be seen how long Russia will continue to comply.

But regardless of what happens in the near term, it appears some oil giants are preparing for the potential transition away from fossil fuels. On Wednesday, French energy firm Total announced it would acquire Direct Energie, an electric utilities firm. From a historical perspective the move is highly unusual, but it marks a turning point as traditional oil and gas players look to diversify into renewable energy—a market largely dominated by utilities firms. Royal Dutch Shell also made a number of similar acquisitions in recent months.

So will other oil giants follow suit? Tough to say, but it certainly bears watching. From Total’s perspective: “This friendly takeover is part of the Group’s strategy to expand along the entire gas-electricity value chain and to develop low-carbon energies, in line with our ambition to become a major responsible energy player.”

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