Key takeaways
Energy stocks continue to face headwinds in an environment where oil supplies outpace demand.
Since early September, oil prices have hovered below the $70/barrel level.
Performance for the energy sector over the past 3-year and 5-year periods remains strong.
Year-to-date, the S&P 500 energy sector gained 17.64%, nearly half of this coming between October 1 and mid-November. This represents a marked improvement over a net loss of more than 1% for the sector in 2023.1 Even so, energy stocks still lag the broader S&P 500, which is up more than 25% in 2024.
On the strength of standout performance in 2021 and 2022, the energy sector is up more than 20% per year for the three-year period ending October 2024, and 14.6% per year over the previous five years.1
Energy prices peaked in 2022 amid a rapid demand surge as COVID-related shutdowns ended and supply constraints emerged tied to the onset of the Russia-Ukraine war. Prices declined significantly since. Energy sector performance soared in 2021 and 2022, a response to higher oil prices.
“The oil market is one that remains well supplied but isn’t well demanded,” says Rob Haworth, senior investment strategy director for U.S. Bank Asset Management. “Although the U.S. economy is strong, other major oil users like China and Germany are experiencing economic challenges. As a result, global demand is lagging.”
In 2023, oil prices were flat to lower, and energy stocks followed suit. Oil prices moved above $80/barrel by mid-March 2024, then held between $70 and $80/barrel for much of 2024’s summer months but have hovered in the $70/barrel range or lower since September.2 Prices for all key energy products remain significantly lower than 2022 peaks.2
|
Category |
2022 Peak Price |
2023 End Price |
Recent Price |
% Change from Peak |
% Change Year-to-Date |
|---|---|---|---|---|---|
|
Crude Oil (barrel) |
$123.64 |
$71.89 |
$68.43 |
-44.7% |
-4.8% |
|
Gasoline (gallon) |
$5.01 |
$3.12 |
$3.05 |
-39.1% |
-2.2% |
|
Natural Gas (mil. Btu) |
$9.48 |
$2.53 |
$1.92 |
-80.5 % |
-24.1% |
|
Heating Oil (gallon) |
$5.15 |
$2.44 |
$2.10 |
-59.2% |
-13.9 % |
Category
Crude Oil (barrel)
2022 Peak Price
$123.64
2023 End Price
$71.89
Recent Price
$68.43
% Change from Peak
-44.7%
% Change Year-to-Date
-4.8%
Category
Gasoline (gallon)
2022 Peak Price
$5.01
2023 End Price
$3.12
Recent Price
$3.05
% Change from Peak
-39.1%
% Change Year-to-Date
-2.2%
Category
Natural Gas (mil. Btu)
2022 Peak Price
$9.48
2023 End Price
$2.53
Recent Price
$1.92
% Change from Peak
-80.5 %
% Change Year-to-Date
-24.1%
Category
Heating Oil (gallon)
2022 Peak Price
$5.15
2023 End Price
$2.44
Recent Price
$2.10
% Change from Peak
-59.2%
% Change Year-to-Date
-13.9 %
All prices published by U.S. Energy Information Administration. Crude Oil price per barrel: West Texas Intermediate (WTI) – Cushing, Oklahoma as of Nov. 12, 2024. Gasoline price per gallon: U.S. Regular All Formulations as of Sep. 18, 2024. Natural Gas price per million BTU: Henry Hub Natural Gas Spot Price as of Nov. 12, 2024. Heating Oil price per gallon: No. 2 Heating Oil Prices: New York Harbor as of Nov 12, 2024.
“Part of the reason energy stocks are doing well even though oil prices are down is that global natural gas prices are up,” says Haworth, senior investment strategy director with U.S. Bank Asset Management. Unlike the oil market, where prices move on a global level, natural gas prices are affected by regional factors. Europe’s demand for liquid natural gas to offset supply disruptions from Russia may be contributing to the trend. Natural gas companies make up roughly one-third of the S&P 500 Energy index.1
The U.S. is now the world’s largest oil producer, with current production reaching record levels.3 Supply interruptions occurred worldwide as Oil Petroleum Exporting Countries+ (OPEC+) trimmed production levels to boost oil prices. However, increased U.S. oil production helped overcome potential supply shortfalls. The U.S. has moved from a net importer to net exporter of oil.4
“The oil market is one that remains well supplied but isn’t well demanded,” says Haworth. “Although the U.S. economy is strong, other major oil users like China and Germany are experiencing economic challenges. As a result, global demand is lagging.”
Nevertheless, oil consumption worldwide is still on the rise, though the pace of growth has slowed.5
President-elect Donald Trump has promoted stepped-up domestic drilling to expand available supplies, but it isn’t clear how aggressive oil companies may be. “In recent years, oil companies focused on repaying capital in the form of dividends to investors or paying down debt,” says Haworth. “Before adding more oil rigs, which are expensive, companies want to know they can produce oil at a cost that justifies stepped-up production.”
In the 1970’s, the energy sector represented approximately 15% of the broader U.S. stock market. Today, it makes up just 3.4% of the S&P 500 index.1 “Yet energy consumption is up since the 1970s, and the important role energy plays in the broader economy is not diminished,” says Haworth. “From an earnings (profit) perspective, energy stocks play a more prominent role in today's S&P 500 than their index weighting would indicate.”
Renewable energy sources such as wind and solar are part of the energy picture today as efforts are made to reduce fossil fuels’ carbon footprint. But renewables make up less than 25% of U.S. electricity generation.6
“Alternatives like wind and solar are not a factor in the S&P 500 Energy Index to this point,” says Haworth. “In some cases, they may be represented in other sectors of the market, such as utilities or information technology.”
Investments in the energy sector today are primarily directed toward more traditional companies that participate in industries like oil and natural gas, with only limited alternative energy opportunities. “The demand for fossil fuels is not going away in the near term,” says Haworth. He emphasizes that opportunities are available even in a market featuring more stable prices. “Many exploration and production companies have productive oil wells and should be able to generate solid profit margins,” says Haworth. “Since these companies tend to return capital to shareholders in the form of dividend payouts, their stocks represent an opportunity for income-orientated investors.”
Other opportunities can be found in what’s referred to as the midstream energy sector, involved in the transportation of crude oil or refined petroleum products. “This sector is less dependent on energy prices than on the flow of oil, and volume moving through these facilities remains high,” says Haworth. Midstream companies tend to pay attractive dividends. However, the investment process can be more complex as it sometimes requires investments in limited partnerships. Partnerships issue K-1 forms to investors for tax reporting purposes, which can complicate an investor's tax filing process.
Consider consulting with your financial professional to determine whether targeted investments in the energy sector can help you meet your long-term financial goals.
Investors gain modest exposure to the energy sector through investments in an S&P 500 index fund or ETF, though the energy sector today represents 3.5% of the S&P 500 Index.1 Choosing to invest in specific energy stocks or an energy sector fund or ETF offers potential to more directly capitalize on this sector. However, it’s important to recognize that energy stocks can experience significant fluctuations in value. For example, S&P 500 Energy sector gained nearly 55% in 2021 and nearly 66% in 2022 before experiencing a modestly negative return in 2023. Through November 18, 2024, the S&P 500 Energy Index gained 17.64% year-to-date, with much of the gain coming in the year’s second half.1 Investors need to be aware of the potential for variable returns in the sector.
Some energy stocks typically perform better when prices rise for underlying commodities such as crude oil and natural gas. In that sense, investors may be able to benefit from owning energy stocks during inflationary periods. However, not all energy stocks perform the same. Rob Haworth, senior investment strategy director at U.S. Bank Asset Management says bottom line results for companies can hold up even if oil prices don’t. “Prices have a major impact on companies that find and produce oil,” says Haworth. “But oil refiners make money from the spread between oil prices and gasoline prices. Storage and transportation company earnings are more affected by the volume and flow of energy.” Haworth also points out that about one-third of the S&P 500’s energy sector is composed of natural gas companies, a market where pricing generally moves independently from oil price trends. Natural gas prices are driven more by domestic supply and demand rather than global market trends.
Though renewables such as solar and wind power are playing a bigger role in the world’s move toward decarbonizing energy generation, investment opportunities may be limited. In the U.S., renewables make up less than 25% of all electricity generation.6 “Alternatives like wind and solar are not a factor in the S&P 500 Energy Index to this point,” says Rob Haworth, senior investment strategy director at U.S. Bank Asset Management. Utility companies emphasizing renewable energy sources offer one opportunity to pursue this part of the market. Some manufacturers of wind or solar equipment also offer opportunities, but they are far more limited than more established, traditional energy companies.
While technology stocks cooled in the third quarter, the sector remains poised to outperform the broader S&P 500 in 2024 for the second year in a row.
With inflation retreating and more interest rate cuts likely, how should investors position their portfolios to capitalize on potential opportunities, while guarding against risks?
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