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Energy Sector Rating: Marketperform

By Brad Sorensen

Energy sector overview

There are myriad shifting winds affecting the energy sector, making a firm call in either direction difficult. Geopolitical events are unpredictable and often impact the energy sector, which should be taken into account along with the fundamentals of the group.

Market outlook for the energy sector

The energy sector, and the price of oil, have been affected by myriad factors over the past several months, leading us to continue to keep a marketperform rating on the sector, as making a firm call in either direction doesn’t seem prudent at this point. The energy sector had performed modestly better, as supply constraints instituted by members of OPEC apparently were holding, according to reports from the International Energy Agency. But that has reversed itself and the group has underperformed over the past three months, despite the recent rise in tensions in the Middle East, as U.S. supply concerns appeared to us to join with uncertainty regarding a potential Saudi increase in oil supply to weigh on the group. With the U.S. Department of Energy reporting that 2018 ended with U.S. production at 11.6 million barrels per day (mbd), up from 9.7 mbd at the end of 2017, oil coming from the U.S. is rising, while the Wall Street Journal reported that President Donald Trump has placed calls to Saudi Arabia asking them to make sure the oil market stays well supplied in the light of Iranian sanctions.

Taking a little larger view, the energy sector’s performance has been volatile, with it being the most volatile sector from 2012-2017 according to the Chicago Board of Exchange (a record we believe continues to hold), as current investors attempt to balance a U.S. demand that allies stop using Iranian oil, with a recent tightening of sanctions exacerbating concerns, Venezuelan production continuing to decline, trade friction, and both inventory and supply concerns.

We admit to being more cautious than others regarding making a call one way or the other on the energy sector, due largely to the potential risks of a sharp turnaround—much as we’ve seen in the past. However, we aren’t opposed to those with higher risk tolerances looking at some of the higher-quality companies in energy when the selling gets to extreme points, such as toward the end of last year, understanding that reversals are quite possible, such as we’ve seen over the past year.

Despite our caution, there remain bullish developments, and should discipline among producers continue to hold—both domestically and globally, we would consider upgrading the group, especially if we see a good China/U.S. trade deal in the relatively near future. Additionally, global growth concerns could dampen oil prices as trade concerns rise, and could affect global activity. But at this point we don’t think growth will deteriorate to the point of producing a reduction in the need for oil, keeping us in the marketperform camp—for now.

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.
  • Rising geopolitical tensions: These tensions, if raised, could result in higher oil prices.
  • Supply concerns. The recent ending of waivers from the U.S. government on countries using Iranian oil could exacerbate supply concerns. 

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.

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