Fall in USD 'generally positive' for US energy sector: PhillipCapital

In his report, PhillipCapital analyst Yeap Jun Rong has also recommended his ETF picks in the event of a Trump or Biden win.

A fall in the US dollar is “generally positive” for the US energy sector, which comprises companies in oil and gas exploration, transport and storage and product refining, says PhillipCapital analyst Yeap Jun Rong.

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That said, Yeap sees a “longer-term” shift towards clean energy, and one that has been underway since 2004. He also believes that the trend towards sustainable energy will continue.

“Since 2004, renewable capacity investments in the U.S have been increasing at a compound annual growth rate (CAGR) of 18.5%. This is the second-largest growth globally, behind China. Despite deregulation of the energy sector during Trump’s term, renewable capacity investments continue to grow at a 2-year CAGR of 15.6%. This suggests an inexorable shift,” he writes in a report dated Oct 14.

Yeap also believes that an oversupply on oil production may persist as its cuts of 6.1% in 2020 may be insufficient to offset a greater 8.5% fall in demand caused by Covid-19.

“Based on Energy Information Administration (EIA) projections, global oil demand as at end-2021 will still fall short of pre-Covid levels, by around 2.4%. Likewise, surplus production capacity could remain 36% higher than pre-Covid levels as at end-2021. If this comes to pass, the glut will drag beyond 2021, capping oil prices,” he warns.

Furthermore, a second wave of Covid-19 infections may trigger another round of partial lockdowns, prolong travel restrictions, cripple the economic recovery, and cause US GDP for 2020 to fall by 8.5% compared to the current dip of 7.3%.

These factors, he says, would make a sustained recovery in the energy sector “highly questionable”.

Touching on the US Presidential Elections that will happen in November, Yeap adds that a second Trump term will likely to be positive for the energy sector as monthly mining, quarrying and production of crude oil increased close to 45% to a record high at end 2019 under his first term, partly due to aggressive rollback of climate and environmental policies.

Biden, on the other hand, is likely to reinstate the environmental policies which Trump rolled back if he wins.

“Reverting to pre-Trump production levels would mean a fall of 12.8% from current levels. With prices suppressed in the near term, a further fall in output would be negative for the energy sector,” he says.

“Instead, Biden will likely accelerate renewable capacity investments in the U.S. and seek to close the country’s gap with China, which has been outpacing the U.S. in renewable capacity investments since 2012. A US$2 trillion ($2.72 trillion) investment over four years alone would imply an 8.2% increase from current investment levels. We may also expect greater adoption of clean energy by companies as they align with the government policy,” he adds.

Yeap has also recommended sector exchange-traded funds (ETFs) for investors to look out for, which include ALPS Clean Energy ETF, SPDR Kensho Clean Power ETF and ProShares UltraShort Bloomberg Crude Oil on a Biden win.

See also: An introduction to ETFs or exchange-traded funds

In the event of a Trump victory, Yeap recommends Energy Select Sector SPDR ETF, iShares US Energy ETF and Vanguard Energy ETF.

Overall, Yeap says he favours the clean-energy space with Biden’s US$2 trillion climate plan should he be elected as the US’s next President.

“The secular shift towards clean energy will continue, we believe, regardless of who becomes president, though a Biden win could greatly hasten the pace. A Trump win may favour the sector and valuations seem attractive at current levels. However, we remain cautious due to prolonged oversupply and risks of virus resurgence,” he says.