Worries about economy and demand weigh on oil and gas prices
WSJ BY HANNAH MIAO, TODAY Shares of oil-and-gas companies led the market last year. This year, they are the biggest laggards.
Energy stocks comprise the worst-performing sector of the S&P 500 this year, down 10%, compared with the broad index’s 7.6% gain. Shares of Chevron are down 13% this year, while Exxon Mobil has shed 4.1%. Warren Buffett’s darling, Occidental Petroleum, has pulled back 8%.
That comes after the S&P 500 energy sector rallied 59% in 2022, the only segment of the index to end the year with gains and the sector’s best year on record according to FactSet data going back to 1990. Russia’s invasion of Ukraine last year shocked energy markets, sending commodity prices soaring alongside energy stocks.
This year concerns about a slowing global economy and energy demand have weighed on oil and gas prices, taking shares of energy companies down with them. Brent crude, the global oil benchmark, has dropped 13% this year, falling to $74.98 a barrel.
“The performance of an energy stock is going to be driven by supply and demand of oil,” said Fernando Soto, a senior vice president in Brown Brothers Harriman’s private banking division. “It’s very, very difficult to predict that.”
Mr. Soto said being underweight in energy shares hurt in the past couple of years, but is helping drive outperformance this year.
On the supply side, Russian oil production has continued to flow, testing Western sanctions. On the demand side, tumult in the U.S. banking sector has heightened concern about a slowdown in the world’s largest economy. Meanwhile, options-hedging has turbocharged volatility in oil prices.
Adding to the unpredictability regarding energy demand is the state of China’s reopening after the pandemic. Trade data released this week signaled the world’s second-largest economy is revving up slower than expected.
“It’s a challenging time for any sector at this particular point in time with all of the near- term uncertainty,” said Leslie Thompson, chief investment officer of Spectrum Wealth Management. “In the last couple of years energy has outperformed significantly, so I think there’s a little bit of reversion to the mean and taking some profits.”
Investors are shunning mutual funds and exchange-traded funds tracking energy stocks. They have pulled more than $7 billion out of energy-equity funds in 2023 on a net basis, according to Refinitiv Lipper fund-flows data as of Wednesday.
Still, some investors believe oil prices and energy stocks could stabilize as fears of a global slowdown abate. Supply remains tight; U.S. oil-and-gas companies have given priority to returning profit to shareholders over expanding production capacity.
Energy stocks only make up roughly 5% of weighting in the S&P 500, according to S&P Dow Jones Indices, but have an outsize impact on profits within the index. Companies in the S&P 500 are set to log a 2.5% annualized decrease in profit in the first quarter, according to FactSet, based on a blend of actual results and estimates for companies yet to report. Without the energy sector, the S&P 500 blended earnings decline would deepen to 3.8%.
The earnings power of energy companies make the sector look relatively cheap from a valuation standpoint. Companies in the S&P 500 energy sector are trading at roughly 10 times projected earnings over the next 12 months, according to FactSet. That compares with the broad index’s multiple of around 18.
Ben Cook, Hennessy Funds’ energy-transition fund portfolio manager, said the fund has remained more heavily weighted in oil-and-gas companies relative to renewable-energy shares, estimating that the oil market could begin to recover in the second half of the year.
“Oil price volatility is inescapable as an investment driver of performance and it’s certainly something that needs to be watched, but we feel there’s an opportunity to attract investor capital into the sector over time, given the strength in earnings,” said Mr. Cook.