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Energy Stocks Climb as Goldman Sachs Report Cites Reasons to be Positive

Goldman Sachs sees energy demand improvement before end of quarter followed by slow recovery over two years.

Energy stocks were climbing Monday as Goldman Sachs issued a reporting citing reasons to positive about the sector despite the record-breaking drop in oil prices due to the coronavirus pandemic.

Oil companies shares were making their presence felt on the S&P 500 recently, with Phillips 66  (PSX) - Get Phillips 66 Report, Sempra Energy  (SRE) - Get Sempra Energy Report, and Marathon Petroleum  (MPC) - Get Marathon Petroleum Corporation Report leading the index. Valero Energy  (VLO) - Get Valero Energy Corporation Report and Hess  (HES) - Get Hess Corporation Report were also climbing. ExxonMobil XOM was advancing on the Dow.

The coronavirus pandemic has sparked the biggest three-month decline for global crude prices in history, as the outbreak has largely shut down the economy. 

West Texas Intermediate was up 1.9% to $20.16 recently, while Brent crude was up nearly 1% to $26.66. 

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"We believe investors should add exposure to energy stocks as we see micro/macro fundamentals bottoming and see the potential for a more lasting medium-term up-cycle depending on the pace of demand rebound," the report said. "We expect global demand will improve off trough before the end of the quarter, and will gradually recover over the next two years."

The report said that shut-in production, which is an implementation of a production cap set lower than the available output of a specific site, and a bottom in demand "should limit the historic oversupply and begin the process of rebalancing the market."

"We see oil prices rising, driven by falling supply from OPEC+/non-OPEC shut-ins/reduced short-cycle shale activity and inflection in oil demand," the report said. "We believe the key risk of moving to the next rung down lies in a much longer period to achieve demand recovery than our base case. This would likely be due to more prolonged or meaningful recurrence of COVID-19."

Regarding clean energy, the report said that "while solar stocks have sold off significantly after a strong start to 2020, we believe long-term fundamentals remain relatively solid, and we see secular growth opportunities across the space reaching more attractive valuation levels than we have seen in some while."

Also on Monday, Goldman Sachs analyst Neil Mehta reiterated his buy rating for ConocoPhillips  (COP) - Get ConocoPhillips Report and added the energy giant to the firm's conviction list, saying in a research note that the company should be a strong participant in an approaching oil-price upcycle.