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Energy Sector

Energy Sector Rating: Marketperform

Energy sector overview

Hurricane Harvey shut down some U.S. production, growth in production in the U.S. appears to be lessening and bloated inventories have been reduced a bit (Ned Davis Research), which could help to support oil prices. While lackluster global growth and fuel efficiency improvements have dampened oil demand in recent years, it's possible that rising U.S. economic growth and potential geopolitical uncertainty eventually could lead to higher oil prices.

Market outlook for the energy sector

In the wake of Hurricane Harvey, both oil and gas prices have moved higher as refineries and wells were forced to stop production for a time.  We don’t think this will be a long-lasting move as many of these facilities, according to the Wall Street Journal, are up and running again. We believe that should allow oil prices to move modestly lower again in the coming months. It continues clear to us that the price driver of oil now is largely in the U.S. for the time being, with domestic oil companies able to ramp up production quickly, while they have reduced the breakeven costs, according to various energy companies’ quarterly reports (such as Pioneer Energy), in many of the oil shale fields.

Meanwhile, Libyan and Nigerian oil production has risen, according to the IEA, which partially offsets the cuts that have been made by OPEC. OPEC members are notorious for violating agreements, which we are again seeing signs of, according to IEA records. OPEC, however, led by Saudi Arabia, is now urging Libya and Nigeria to limit their production and increasing pressure on member countries to comply, according to the Wall Street Journal. However, global growth has improved, with recent Markit PMI readings rising, which could help to support oil demand growth. But at this point we don’t think growth will rise to the point of producing a spike in the need for oil, keeping us in the marketperform camp.

It is often said that the cure for high energy prices is high energy prices. The opposite can also be true: low energy prices can stimulate demand—resulting in potentially higher prices. Overall, we believe the factors outlined above support a rating of marketperform.

Factors that may affect the energy sector

Positive factors for the energy sector include:

  • Potential increase in energy demand: The U.S. economy is growing and developing nations will likely need more energy as they improve their infrastructure and modernize their economies.
  • Accommodative monetary policy: Central banks in the developed world generally appear to have an easing bias, which could help the more cyclical sectors such as energy.
  • Rising geopolitical tensions: These tensions, if sustained, could result in higher oil prices and improving sector performance.

Negative factors for the energy sector include:

  • New supply: Energy supply has increased dramatically with a renewed commitment to exploration and technological improvements. 
  • Increased conservation: Conservation efforts and new technology could affect the growth in demand for energy products.
  • Energy use restrictions: Severe pollution problems in China could result in mandates to cut energy use.

Clients can see our top-rated stocks in the energy sector.

Want to learn more about a specific sector?  Click on a link below for more information or visit Schwab Sector Views to see how they compare.

Consumer discretionary Consumer staples Energy
Financials Health care Industrials
Information technology Materials Real estate
Telecom Utilities

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Consumer Staples Sector Rating: Marketperform
Financials Sector Rating: Outperform
Financials Sector

Important Disclosures

Schwab Sector Views do not represent a personalized recommendation of a particular investment strategy to you. You should not buy or sell an investment without first considering whether it is appropriate for you and your portfolio. Additionally, you should review and consider any recent market news.

Performance may be affected by risks associated with non-diversification, including investments in specific sectors. Each individual investor should consider these risks carefully before investing in a particular security or strategy.

All expressions of opinion are subject to change without notice in reaction to shifting market and other conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Companies within the energy sector may be significantly affected by energy prices, supply and demand for energy fuels, the success of exploration projects, government regulations and other factors.

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