Trump is back in the White House! Are there opportunities in the NENGYUANHANGYE?

The results of the U.S. election are out, and Trump has been elected president of the United States again. Trump's energy policy is widely known, opposing the application of new energy and supporting the extraction of fossil fuels, and he clearly stated in his campaign agenda that he would withdraw from the Paris Climate Agreement again. During the campaign, Trump repeatedly mentioned the slogan "Drill, Baby, Drill."

Due to the distinct policy direction, traditional energy has also been seen as an important component of the "Trump Trade."

However, investors may not have noticed that during Trump's previous term, the energy industry performed the worst among the 11 sectors of the S&P 500. Energy became the only sector to decline, with a drop of nearly 40%.

During his first term, Trump also adopted very friendly policies towards traditional energy; why did it perform so poorly? What could happen during the second term? This week's "Opportunity Dispatch" will attempt to answer these questions.

Increasing quantity does not equal rising stock prices!

The dismal performance of the energy sector during Trump's first term was largely due to the impact of the pandemic. Due to global travel restrictions, transportation and industrial activities decreased significantly, leading to a sharp decline in energy demand. In April 2020, there was even a rare instance of negative oil prices, and companies in the industry suffered heavily that year.

However, even without considering the impact of the pandemic, the energy industry performed poorly. If the time frame is set to early January 2020, before oil prices collapsed, the entire sector has also dropped by 6.85% since Trump took office.

After Trump took office as the President of the United States in 2017, he implemented a series of policies to support the fossil fuel industry. He cut back on environmental regulation restrictions (such as methane emission standards) and expedited the approval process for industry projects, leading to significant development in crude oil extraction during this period. According to Rystad Energy statistics, from 2016 to 2019, $Exxon Mobil(XOM.US)$ 、 $Chevron(CVX.US)$ 、 $Shell(SHEL.US)$ The average annual capital expenditure of several industry giants reached 10 billion US dollars.

The content of this chart is for reference only and does not constitute any investment advice.

The domestic shale oil production in the United States significantly increased during Trump's first term, surpassing Saudi Arabia in 2018 to become the largest crude oil producer. As production increased, competition among producers also intensified, and crude oil prices began to show significant adjustments starting in the fourth quarter of 2018, which also impacted the industry's performance.

A friendly policy environment does not guarantee smooth sailing for the industry. S&P Global states that commodity prices and Wall Street are the true decision-makers for the industry, not the president.

Under the leadership of the Democratic Party, which has always had a tense relationship with the traditional energy industry, coupled with high inflation and geopolitical conflicts, the energy industry actually experienced a bull market lasting several years alongside soaring prices.

The capital expenditure of several industry giants has also significantly narrowed, decreasing from 10 billion US dollars to 7 billion US dollars, which has greatly changed the situation in the industry. According to Morningstar statistics, during Biden's presidency (up to Q3 2024), energy stocks achieved a 75% excess return relative to the broader market, far surpassing the period of Trump's administration.

Bank of America has stated that the recent price surge will be controlled, and there will be downward risks for crude oil prices in the future. They have also observed that hedge funds chose to sell oil producers on the rebound after the election results were announced, rather than actively entering the market to buy as they did in the past.

Are you focused on 'pick-and-shovel stocks'?

The concept of 'pick-and-shovel stocks' originates from the California Gold Rush era, where merchants selling shovels and other tools often made more stable profits than the gold rushers themselves. For example, $NVIDIA(NVDA.US)$ as a pick-and-shovel stock in the AI era, it relies on powerful GPUs to become a leader in the global market.

In the NENGYUANHANGYE, pick-and-shovel stocks refer to companies that provide equipment, services, and technical support for resource extraction and production. These companies do not directly produce crude oil, but their business is usually highly correlated with the capital expenditures of producers. If there is a significant increase in crude oil extraction activities during Trump's second term, the performance of oilfield service companies may also be boosted.

The oil service industry has 'three giants', all listed in the United States, including$Schlumberger(SLB.US)$ 、 $Halliburton(HAL.US)$ and $Baker Hughes(BKR.US)$ These companies have a long history, all established in the early 20th century. Their businesses cover multiple aspects, including exploration, operation, and equipment, and they operate globally. According to Yakov & Partners data, the three giants held a 56% market share in North America in 2023, with Halliburton having the highest share at 25%.

However, the future capital expenditure situation for producers still needs to be closely monitored. Zacks Investment indicates that upstream companies have been cautious about capital expenditures after experiencing a 20-year cycle low, placing more emphasis on shareholder returns rather than increasing production, and this trend may continue. The Financial Times also reported that investors are exhausted from years of debt-driven drilling booms, and the existing capital discipline model is unlikely to change.

What should be noted in energy investment?

As mentioned in our section on the lithium resources industry, cyclical stocks have characteristics distinct from other industries. Investors may need to make overall judgments based on industry trends and supply-demand conditions rather than just current financial performance. Energy also belongs to the cyclical category, and unlike lithium resources, due to the existence of organizations like OPEC, geopolitical factors can significantly influence the sector in addition to its own cyclical fluctuations.

Additionally, if you are involved in investment in Crude Oil ETFs, you may notice a strange phenomenon: unlike Gold and other precious metal ETFs, the price movements of Crude Oil ETFs often show significant divergence from futures prices, and in the long run, they even lag behind Crude Oil prices significantly.

The content of this chart is for reference only and does not constitute any investment advice. Past performance does not indicate future results, and the market carries risks that require cautious investment.

Gold, as a precious metal, has a high unit value and is also easy to store and manage. Therefore, most Gold ETFs directly hold physical gold, resulting in smaller tracking errors.

Crude oil, on the other hand, belongs to a bulk industrial product, and related ETFs operate by holding futures contracts. The current largest scale... $United States Oil Fund LP(USO.US)$For example, it holds the WTI Futures contracts for the current month and rolls over to the next month's contract as it approaches expiration, a process also known as "rolling over."

If the distant month contract price is higher than the most recent contract price, USO needs to Buy the distant month contract at the higher price, resulting in a roll over loss. In this situation, even if the spot price remains unchanged or rises, the net asset value of the ETF may still suffer losses. Conversely, if the distant month price is lower than the near month price, it can also benefit from the roll over.

Holding physical Crude Oil Product requires payment for storage fees, which are reflected in the prices of futures contracts. Therefore, Futures contracts usually show a positive spread (where the forward price is higher than the recent price), which means that the performance of Crude Oil ETFs may not keep up with futures trends in the long term.

Risk Disclosure: This content does not constitute a research report, is for reference only, and should not be used as the basis for any investment decision. The information contained herein is not a comprehensive description of the securities, markets, or developments mentioned. Although the sources of information are considered reliable, the accuracy or completeness of the above content is not guaranteed. Furthermore, there is no guarantee regarding the accuracy of any statements, viewpoints, or forecasts provided in this article.