The global energy sector was up 5% relative to the global equity market yesterday driven by a combination of factors from a new Covid-19 vaccine from AstraZeneca, better than expected November PMI figures in the US, and the rumour that former Fed Chair Janet Yellen is Biden’s pick for a new US Treasury Secretary. Since the market got the first Covid-19 vaccine news from Pfizer on November 8, energy stocks have outperformed global equities by 24% underscoring investors are positioning themselves for a normalisation in 2021.
Brent crude has also moved into backwardation suggesting oil markets are normalising which could mean both higher prices and higher volume. Before we get too carried away about the outlook it is worth recognizing the fact that work-from-home and flexible work hours could still cause a more permanent reduction in oil demand, and the transition to electric vehicles will also add headwinds over the coming years. But as we have shown before in the chart below, the energy sector’s underperformance relative to the global equity market has been massive down 76% since the peak in 2008. This underperformance combined with low equity valuation could make energy stocks the best segment in global equities in 2021.