Energy sector overview
Apparent discipline among oil producers appears to have helped the energy sector, although questions remain as to how long that can last. While lackluster global growth and fuel efficiency improvements have dampened oil demand in recent years, it's possible that rising U.S. and global economic growth and potential geopolitical uncertainty eventually could lead to higher oil prices.
Market outlook for the energy sector
The energy sector has moved higher as of late, although still lagging the gains seen in the price of oil. The divergence between the two is historically large, according to ISI Evercore Research, and gaps like this haven’t lasted. The question is whether the price of oil will move down or the energy sector will move higher at a rapid rate. We tend to think it will be a mix of the two, with the price of oil more likely to do the bulk of the work by moving modestly lower. We’re still concerned that the discipline shown on the supply side both with OPEC and here in the U.S. won’t last as companies and countries chase profits. Meanwhile, the cold snap through the eastern part of the U.S. had helped to move oil prices higher, but we believe things will warm up and some of that move will be reduced.
We admit to being more cautious than others with regard to the energy sector, but we aren’t underweight and we believe some caution is still warranted. U.S. oil production, in our view, could ramp back up relatively quickly, which could put renewed pressure on oil prices. But undoubtedly there are bullish developments and should discipline hold in the face of $60+ oil, we would consider upgrading the group. To be sure, 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—for now.
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 raised, could result in higher oil prices.
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.
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