Why Energy-Related Stocks Are Off To A Strong Start In 2018

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Includes: BGR, CRAK, DDG, DIG, DUG, ERGF, ERX, ERY, ERYY, FENY, FIF, FTXN, FXN, IYE, JHME, NANR, OIH, PXJ, RYE, VDE, XLE
by: Tortoise
Summary

Flows averaging over $60 million per day for the first week.

Reports are expecting a shift in focus from restructuring and distribution concerns to improving volumes, operating leverage and attractive valuation.

A key driver of market strength last week was a continuation of crude rebalancing.

The strong energy market start is due to a few reasons in our view. New fund flows have been outstanding, general interest and optimism from Wall Street and continuation of crude market rebalancing are the drivers.

On the first point, we got off to a great start on flows averaging over $60 million per day for the first week. To put this in perspective the last three years have averaged daily flows of around $20 million and you have to go back to 2014 to get average inflows over $60 million. Obviously we only have a few days of data but it’s an encouraging start nonetheless.

Regarding the Wall Street view, we spent the first week of the year going through 2018 outlook pieces and the consensus is reason to be optimistic and all indications are that there is a great deal of new interest in the space. Reports are expecting a shift in focus from restructuring and distribution concerns to improving volumes, operating leverage and attractive valuation just to name a few. Of course we do still expect some additional restructuring and IDR collapses this year, but expect these would be done from a position of strength and not generate a negative outcome. Fourth quarter Wall Street consensus earnings estimates for the energy sector have increased almost 25% over the last three months, reflecting an improving operating environment and higher crude prices. This is the biggest quarterly earnings revision that we can recall.

The last key driver of market strength last week was a continuation of crude rebalancing. To illustrate this point all you have to do is look at the inventory report where U.S. crude inventories dropped 7 million barrels for the week. In the natural gas market, extreme cold across the country and a “bomb cyclone” generated huge gas demand with one day running over 150 bcfd of pull which was an all-time daily record for gas consumption.

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