US Energy Sector Faces Headwinds as Red Sea Tensions Intensify

In the wake of a recent surge propelling various segments of the US stock market, the energy sector finds itself lagging, prompting optimistic investors to speculate on a potential turnaround driven by forthcoming earnings reports and escalating geopolitical tensions.

Since late October, the energy sector has witnessed a decline of nearly 3%, a stark contrast to the broader S&P 500’s impressive 16% upswing during the same period. 

Last year, while the benchmark index soared by 24%, energy experienced a significant setback, registering a 4.8% drop, marking the second-largest decline among S&P 500 sectors.

Despite the overall optimism in economically sensitive sectors, such as banks and small-cap stocks, which have thrived on the belief in a stable economic growth trajectory with subsiding inflation, the energy sector has struggled to keep pace.

A primary factor contributing to the sector’s underperformance has been the substantial dip in oil prices, with US crude witnessing a more than 20% decline since late September, currently hovering around $73 per barrel. 

This downward trend is attributed to robust oil supplies, notably in the US, coupled with concerns about subdued demand in China and Europe.

Matthew Maley, Chief Market Strategist at Miller Tabak, notes that the energy sector is closely tethered to oil prices, suggesting that a breakout in oil prices could swiftly propel the sector back into contention.

This sentiment aligns with the recent upgrade of the energy sector’s rating by Wells Fargo Investment Institute (WFII) from “neutral” to “favorable.” 

WFII strategists anticipate that oil prices will find a bottom in conjunction with the global economy and foresee a subsequent rise by year-end.

Potential Middle East tensions and OPEC’s production decisions are identified as influential factors that could impact short-term oil prices. 

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Geopolitics Lift US Crude Amid Energy Earnings Woes

us-energy-sector-faces-headwinds-red-sea-tensions-intensify
In the wake of a recent surge propelling various segments of the US stock market, the energy sector finds itself lagging, prompting optimistic investors to speculate on a potential turnaround driven by forthcoming earnings reports and escalating geopolitical tensions.

Recent events, including US and British strikes on Houthi targets in Yemen, contributed to a 4.5% surge in US crude prices.

While acknowledging that energy is poised for the worst full-year earnings performance in 2023, falling nearly 26%, WFII strategists highlight the sector’s anticipated 1.6% earnings growth in 2024. 

They underscore the historically cheap valuations of energy shares, trading at approximately 10 times trailing earnings, compared to the S&P 500’s trailing P/E ratio of 22.

Investors are closely monitoring upcoming quarterly earnings reports from key players in the energy sector, including SLB (formerly Schlumberger), Baker Hughes, and Marathon Petroleum. 

Despite the anticipated improvement in earnings, the sector is projected to trail the overall S&P 500’s 11.1% increase in 2024.

Walter Todd, the Chief Investment Officer at Greenwood Capital, shows the positive trend in earnings, the appealing valuations, and the energy sector’s potential to act as a safeguard in the face of geopolitical tensions. 

His firm maintains an overweight position in energy, with holdings in Conocophillips and Chevron.

Contrary to this optimism, Robert Pavlik, Senior Portfolio Manager at Dakota Wealth Management, remains cautious, considering oil fairly priced. 

He expresses a preference for sectors like industrials and technology, anticipating greater benefits in those areas compared to energy, citing concerns about the US economy slowing pace and skepticism regarding a lasting boost from Middle East conflicts.

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