In just one year, the outlook for oil markets has drastically changed. Ken Cedeno/Getty Images
Bank of America says that although oil prices have risen to multi-year highs, it is unlikely that this will benefit S&P 500 earnings in the same way they did in the past.
One factor that is a tailwind for the oil exploration companies is their tightening spending.
The oil market is in deficit and US oil prices have risen more than 70%.
Oil prices have reached multi-year highs, and such moves tends to boost S&P 500 index. However, budget tightening by US companies and other factors are reducing the impact that the latest crude oil spike could have on the benchmark.
This conclusion was reached by Bank of America Friday in a research note.
"Historically, higher oil prices have translated into higher earnings for S&P 500," Savita Subramanian (head of US equity strategy and quantitative strategy, Bank of America) stated in the note.
The investment bank stated that the negative impact of rising oil prices on the index will be hampered by the S&P 500's shrinking energy beneficiaries and the capital discipline of oil producers and oil explorers.
A 10% increase in oil prices used be equivalent to a 5% rise in S&P 500 per share earnings. This was partly because it led to higher capital expenditures that supported oil-services businesses. This year, oil prices have risen because of the removal COVID restrictions which boosted energy demand and contributed to a deficit in supply.
West Texas Intermediate crude oil futures rose more than 70% to trade at $73 per barrel, a seven-year record. Brent oil, an international benchmark, has risen to three-year highs and will gain approximately 65% in 2021, reaching $85 per barrel. If low oil stockpiles, a rebound in air travel and a cold winter combine, Brent oil prices will rise to $100 per barrel.
However, oil was last above $100 per barrel in 2014. This was back in 2014. The landscape was different and does not have the same trickle-down effect.
BofA stated that oil beneficiaries (Energy and select Industrials, Chemicals), accounted for 20% to 25% of total S&P 500 earnings back in 1980. Today, this number is only 6%.
Oil E&P's have increased capital discipline. The number of active oil drilling rigs is now more than half that of the peak.
BofA's oil service analysts for 2022 expect an approximately 22% increase in E&Ps' capex, despite oil prices at $80 per barrel. However, that's still 23% less than 2018 levels.
This means that energy capex beneficiaries will receive less revenue and higher oil prices will result in a lower earnings multiplier. BofA stated that higher oil prices will drive energy earnings more than price + volume.
