JPMorgan's market guru Kolanovic sees an outsized move in energy stocks ahead

Published Wed, Feb 10 202110:18 AM EST

A new commodity supercycle is underway, and there could be big gains ahead for the energy sector, according to Marko Kolanovic, JPMorgan's head of macro quantitative and derivatives strategy. The firm said that a number of factors could drive prices higher, including retail investors' interest in the sector. Kolanovic, who nailed the comeback for stocks last year, said that the last supercycle for commodities peaked in 2008 and bottomed in 2020 following a 12-year contraction. After a brutal year for the industry — best illustrated by West Texas Intermediate crude futures briefly tumbling into negative territory for the first time in history — a number of bullish factors should fuel a turnaround in 2021. "Mostly it will be the story of a post pandemic recovery ('roaring 20s'), ultra-loose monetary and fiscal policies, weak USD, stronger inflation, and unintended consequences of environmental policies and their friction with physical constraints related to energy consumption and production," Kolanovic said Wednesday in a note to clients. WTI futures hit $58.76 per barrel on Wednesday, the contract's highest level since January of 2020. Following last year's unprecedented demand loss as the pandemic shuttered worldwide economies, supply cuts from OPEC and its oil-producing allies have supported prices. Taken with the vaccine rollout currently underway, traders believe oil will see an uptick in demand, especially in the second half of 2021. Kolanovic noted that commodities could attract investors interest as a way to hedge the inflation rise. "Energy equities could present a good hedge for bond-equity correlation – they often deliver a yield (like bonds) but also hedge the inflation and bond-equity correlation risk," he said. Energy is the top-performing S & P group this year, gaining more than 16%. Communications services is a distant second for the year, rising 7%. Over the last year, however, energy is the worst-performer, declining more than 17%. Amid energy stocks' decline the sector has gone from an 8% weighting in the S & P 500 five years ago to 2.5% today. Kolanovic noted that retail investors' energy equity allocation has slipped from 4.4% to just 0.6%, but the beaten-down sector might now be an attractive bet for individual investors looking to game the market. "Given the increased retail activity and interest in stocks that are volatile, have high short interest, are smaller in size and have thematic news/social media coverage ... the sector will likely also be of interest to retail investors," he said. The firm noted that overall energy allocation in equity portfolios slipped from 10.6% between 2010 and 2015 to 3.1% today, with the largest outflows from active allocations. Given the roughly $14 trillion asset base, any rotation could lead to an outsized move for prices. "As economies reopen, inflation moves higher, and yield curves steepen, active funds are expected to first close cyclical shorts, and then rotate from long secular growth towards value and cyclicals," Kolanovic said. - CNBC's Michael Bloom contributed reporting.

A pumpjack (oil derrick) and oil refinery in Seminole, West Texas.

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