Oil and Gas Lags Broader Market and Fundamental Commodity Performance

First table shows the Q/Q performance (2Q21 vs 1Q21) in terms of the % change in the average daily price for each metric. Across the board it’s an impressive set of results. Second table shows the Y/Y performance (2Q21 vs 2Q20) again in terms of the % change in the average daily price. These results are astounding! Of course, it is a comparison against market lows… remember that WTI traded in negative territory for a short period. However, when considered in context the results are less impressive for the oil and gas industry. The chart shows the same metrics indexed to 100 at the beginning of 2020. Now the relative performance is more apparent. As of the end of 2Q21, the broader markets are up 32% (S&P 500) and 20% (Dow). Two of the industry’s key commodities are up 71% (Henry Hub) and 19% (WTI). In contrast the S&P Oil & Gas Exploration and Production Index is up marginally at 3% and the S&P Oil & Gas Equipment and Service Index is actually down 23%.

Some possible reasons behind this trend: 1) capital rotation out of oil and gas investments. Many endowments, managed pensions, and sovereign funds have made public commitments to divest their oil and gas holdings. If these new directives have been implemented, even on a small scale early in the process, it would cause some downward pressure. 2) discounting capital discipline. Some analysts and market pundits remain skeptical of the oil and gas industry’s commitment to capital discipline. The market could be discounting future returns to adjust for some probability of a fallback to prior spending patterns. Regardless of the underlying driver(s) in the oil and gas industry market performance, it is worth noting that this divergence is yet another example of an uneven economic recovery that has disproportionately benefited some industries.?????