By: Spencer Israel
There is no sector as out of favor as the energy right now. In a year in which every sector is green and the S&P 500 is up 16%, energy stocks are lagging hard.
As of August 20, the Energy Select Sector SPDR ($XLE) was up a mere 1% year-to-date, and the underperformance has dropped energy’s weighting in the S&P 500 index to 5%, the lowest in at least the last 40 years according to Barron’s.
All this in an environment where oil has risen 30% in 2019, (though it’s still of its highs from 2018), and it’s fair to wonder why investors have fled the sector.
Stable Demand for Oil, But Not Much Growth
With fears of a global slowdown and escalating trade tensions, oil has been in the crosshairs in 2019. But those aren’t the only reasons oil has fallen off this year.
Even with OPEC extending supply cuts to 2020, the U.S. has continued its near-record output of over 12 million barrels per day. On top of that, OPEC’s recently lowered forecast for global oil demand growth from 1.14 million to 1.10 million barrels/day signaled that there’s likely to be a slight surplus of supply in 2020. Whether or not the organization reacts to that by introducing more price cuts remains to be seen.
So while demand for oil remains relatively stable and OPEC is doing its best to keep prices higher, investors have clearly taken the message that oil isn’t a growth area right now.
How The Stocks Have Reacted?
As a result, oil & gas companies have been hit the hardest. Occidental Petroleum ($OXY) is down 25% YTD, while ConocoPhillips ($COP), EOG Resources ($EOG), and Schlumberger ($SLB) are down 13%, 10% and 5% YTD respectively. .
Even the industry’s leaders are not immune from the underperformance, with Chevron ($CVX) only rising 7% and ExxonMobil ($XOM) up 1% YTD. And as if to add insult to injury, clean energy names in the solar space, such as First Solar ($FSLR) and SunPower ($SPWR), have ripped higher this year.
The bull case for these companies has not changed—stable demand for crude, strong dividends, and now, low valuations—but if the sector is going to turn around, it will likely have to be on the back of a major geopolitical development on the trade war front or a reignition of the M&A stove.
The bidding war between Occidental and Chevron for Anadarko earlier this year seems like a faint memory now.
As for the bears, the conventional thinking will likely remain for the time being: if these stocks can’t go up when the price of oil is rising like it has in 2019, when can they go up?
The author has no positions in any of the stocks mentioned in this article.
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