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The energy sector has been the market's laggard for years, but Goldman Sachs believes now is the time for investors to add exposure to these stocks.
The firm's bullish case rests on five key reasons, including the recent decline in oil prices and subsequent production cut announcements, as well as the prospect of improving demand for crude as economies around the world reopen.
"Lower supply and a bottom in demand should limit the historic oversupply and begin re-balancing the market," Goldman analysts led by Brian Singer said in a recent note. The firm believes an inflection point will be reached in June, at which point there will be a shift from building inventories to drawing inventories.
"With WTI spot oil prices averaging $3/bbl during the last week, we note that oil prices are now well below cash costs and believe this may be a catalyst for investors to become more positive on Energy equities," the firm added.
Singer also noted that the sector has held up well recently despite industry headwinds. This month energy is the top-performing S&P sector after gaining 30%. For the year, however, it's the worst-performing sector.
Within the oil ecosystem, Goldman said exploration and production stocks are "increasingly attractive" given that they are highly levered to the price of oil.
"Our view that prices will normalize to $55/bbl WTI in 2H21 can lead to strong equity performance as companies begin to flatten and grow production again," Singer said.
Here are Goldman's picks: