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Analysis-U.S. energy shares on fire again to start 2022, stoked by inflation -Breaking


© Reuters. FILEPHOTO: Inflation drives up gas prices as seen in this sign posted at Solana Beach Gas Station, California. This is November 9th, 2021. REUTERS/Mike Blake/File photo

By Lewis Krauskopf

NEW YORK (Reuters), – U.S. shares are soaring early in 2022. The rise of value stocks and assets, which can benefit from the sharpest inflation for nearly 40 years, is driving the shift to U.S.-based energy companies.

Energy sector has seen a 14% increase, while the overall index is down 0.8%. Energy also posted the biggest gains of any S&P 500 sector last year, rising nearly 48%.

Several factors are behind the sector’s performance. The sector’s performance has risen by 23% from early December to its peak level in late 2018

Inflation has been driven by rising energy costs over the last year. Last month’s consumer prices saw their biggest annual increase since June 1982.

“If oil is on the rise and natgas is on the rise, it is going to mean an increase in earnings for those companies that are involved in the energy sector,” said Robert Pavlik, senior portfolio manager at Dakota Wealth Management. Pavlik owns shares of Dakota Wealth Management and is therefore overweight in energy sectors. Chevron (NYSE: Pioneer Natural Resources (NYSE:).

S&P 500 energy companies overall are expected to increase revenue by 72.7% for the fourth quarter from the year-earlier period, according to Refinitiv IBES. Baker Hughes and Schlumberger (NYSE) will report next week.

According to Willie Delwiche (an investment strategist at market research firm All Star Charts), the Energy sector’s 12.2% spread on the median sector performance for the first week in 2022 was the second-largest weekly outperformance over the last decade.

“The group has a pretty good record of outperforming the market in inflationary periods and we are in an inflationary period,” said Peter Tuz, president of Chase Investment Counsel Corp. Chevron and Baker Hughes are among the wealth management firm’s energy stock holdings (NYSE:).

The sector’s outperformance also reflects a broader shift from tech and high-growth stocks that jumped last year to companies that stand to benefit from higher Treasury yields, as surging inflation increases expectations the Federal Reserve will be more aggressive in normalizing monetary policy.

The S&P 500 growth index is down nearly 3% so far this year, while the S&P 500 value index, which is more heavily weighted in shares of energy firms, banks and other economically sensitive and comparatively cheap companies, has risen 1.5%.

The relatively small size of the 21-company energy sector, which has a 3% weight in the S&P 500 compared to a nearly 7% weight for Apple (NASDAQ:) alone, means that even small shifts in investors’ portfolios could buoy energy stocks.

“When you see all the selling that is going on in the megacap tech stocks, if even a fraction of that money finds its way into the energy sector, the stocks ought to do well,” Tuz said.

The energy sector’s robust gains follow years of underperformance amid volatile commodity prices, company struggles with capital discipline and investor wariness of fossil fuel investments. This sector has seen a decline of 7% over 2011 compared with a gain of 620% for the technology sector.

The Fed might not raise rates as aggressively as anticipated, which could increase the appeal of tech companies. These firms are sensitive to higher yields and reduce demand for energy stocks. The impact of slowing global economic growth could also affect crude oil prices.

However, for now analysts seem to be confident in the strength of oil prices.

Analysts at UBS Global Wealth Management said Wednesday that energy stocks were “well-placed” for 2022. They cited their expectation of Brent remaining between $80 and $90 per barrel in the coming year, as well as the sector’s high dividend yields.