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Energy Sector

Energy Sector Rating: Marketperform

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

Political tensions in Saudi Arabia have appeared to increase concern that the flow of oil from the region could be affected, resulting in a move higher in oil prices.  At this point, we don’t see the situation developing that way and believe there was some overreaction that will be reversed.  Of course, the situation could widen and deteriorate, at which point we would have to reassess our view.  More fundamentally, oil producers have shown signs of discipline as of late, with the domestic rig count turning modestly lower and Reuters reporting approximate 90% compliance rate among OPEC and non-OPEC members who agreed to cut production through March of 2018.  This appeared to have helped the energy sector rally after a rough first half of the year, although the recent moderation in gains lead us to believe investor skepticism remains. We also continue to be skeptical that the discipline will hold, especially as lower costs become available to American producers, meaning that a sustainable rally at this point seems unlikely to us.  

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 according to IEA records, and we have heard reports from Reuters that the Iranian oil minister complained that Libya and Nigeria aren't subject to the same cuts as other OPEC members. this could result in breaks in the agreement, in our opinion, which could put downward pressure on oil prices. 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 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.

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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