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Energy Sector Rating: Marketperform

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 affect 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 has continued to struggle lately, with investors apparently skeptical that pronouncements by OPEC that it may cut oil production further (Wall Street Journal) will actually make a major dent in the supply/demand dynamics. Trade disputes and global growth concerns, with the Chinese Markit PMI moving closer to contraction territory, appear to also be weighing on the group. Additionally, U.S. inventories as reported by the Energy Information Agency have surprised on the upside recently.

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 Options Exchange (a record we believe continues to hold), as current investors attempt to balance the 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 we believe we’re seeing now, understanding that reversals are quite possible, such as we’ve seen over the past year. Due to this possibility, and the numerous crosswinds described above, however, we remain at marketperform for the group, with the understanding that patience is going to be required.

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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