Since Saudi Arabia and Russia cut production in the summer, the price of oil has risen significantly and temporarily reached a new ten-month high. However, oil stocks performed less well over the same period. According to experts, there are various reasons why they cannot really benefit from the strong development of oil prices.
• Oil prices hit new ten-month highs, but average price in Q3 below previous year
• Energy stocks are lagging due to weak balance sheets and economic concerns
• Analysts split on sector
In the last three months, the price of Brent oil has increased by around 22 percent (as of October 1, 2023). WTI also rose sharply in the same period. Continuing tailwind for black gold comes from production cuts by Saudi Arabia and Russia. According to experts, these would create a daily supply deficit of three million barrels of crude oil, writes “Oilprice.com”. According to Barron’s, this oil deficit is forcing refineries to draw on their inventories and at the same time driving up prices. But while oil prices have been on the rise for weeks, shares of companies in the energy sector are clearly lagging behind in their performance. There are probably several reasons why they can only benefit to a limited extent from the oil price rally.
Energy sector with comparatively weak performance
While WTI crude oil became 25.71 percent more expensive in the last three months and the price of Brent oil rose by 22.26 percent (as of October 1, 2023), the S&P 500 Energy Sector Index was only able to reach 11 in the same period .3 percent gain (as of: closing price on September 29, 2023). The S&P 500 Energy Sector Index is a sub-index of the S&P 500 that combines all energy stocks from the broad US index. While the sub-index is clearly lagging behind the development of oil prices, it still performed better than the entire S&P 500, which lost 3.65 percent in the last three months (as of closing prices on September 29, 2023).
The reason why oil stocks have recently shown themselves to be less strong than the oil price is probably due to several factors. According to “Oilprice.com”, for example, sentiment for the industry is currently somewhat negative after companies from the gas and oil sector disappointed in the last reporting season. Three of the five sub-sectors of the sector suffered a decline in profits of more than 20 percent year-on-year. Four of the five sub-sectors also recorded declines in sales of more than 10 percent. According to the website, companies in the integrated oil and gas industry suffered a 50 percent decline in profits and a 26 percent decline in sales compared to the previous year, while companies in the oil and gas exploration and production sector saw profits fall by 44 percent and sales by 27 percent . Meanwhile, oil and gas refining and marketing companies’ profits fell 22 percent, while sales fell 14 percent. However, the oil and gas storage and transport sub-sector was able to increase its profit by five percent despite a 14 percent decline in sales. Only companies in the oil and gas equipment and services sector – including Baker Hughes, Halliburton and Schlumberger – recently recorded increases in both profits and sales of an average of 29 and 14 percent, respectively, because their services were in high demand.
Overall, however, the energy sector recorded the largest year-on-year decline in sales and profits of all sectors in the S&P 500. “Oilprice.com” attributes this to the fact that although oil prices have soared in the recent past, the average oil price was still up in the third quarter below that of the same period last year. The average oil price in the third quarter of 2022 was $91.43, while in the third quarter of 2023 it was only $80.39. This year-on-year lower oil price is putting a strain on the results of the companies in the sector and thus also on the performance of their shares.
Concerns about the sustainability of the oil price increase given the weak economy
However, investors may also be cautious about oil stocks because they do not believe that the rise in oil prices will prove sustainable given the current economic concerns. Because when the economy weakens, demand for the raw material usually also falls. “I think it’s simply that investors don’t believe the recent significant rise in oil prices is sustainable and that there are still risks to the economy and oil at this point in the cycle,” wrote analyst Leo Mariani at Roth MKM, in an email to “Barron’s”. In his experience, energy is usually sold when there is a risk of a possible economic slowdown, he added.
According to Reuters, equity strategist Andreas Bruckner from Bank of America also expressed the same concerns, and even sees downward potential for oil stocks. “We have been underweight energy stocks because there is scope for oil prices to decline from current levels as weakening US demand sets in, and changes in spot oil prices are typically what drive the relative performance of oil stocks,” said Bruckner. “We do not believe that oil has bottomed out for this cycle, which would mean that the energy sector has not yet bottomed relative to the market,” he continued. In fact, according to “Barron’s”, the futures market is currently expecting a decline in oil prices in the coming year due to economic concerns. This is also likely to be a factor weighing on oil stocks.
Experts still have buy recommendations for oil stocks
But not all analysts agree on the energy sector. Some experts believe that some oil stocks still have potential for price gains given the high oil prices. As “Oilprice.com” reports, citing data from TipRanks, the energy sector even has the highest rate of buy recommendations of all sectors in the S&P 500. “We are optimistic about the energy sector with an overweight because we believe it is attractively priced “, has a strong balance sheet and high cash generation, especially given the recent recovery in oil prices,” said Mislav Matejka, head of global and European equity strategy at JPMorgan, according to Reuters.
Bill Smead, chief investment officer of Smead Capital Management, also recommended buying energy stocks, according to “Barron’s”. However, he primarily relies on undervalued shares in smaller companies in the industry because he sees potential for takeovers. According to Smead, there is currently an imbalance in the market between oil giants and other companies in the industry. Many smaller companies’ oil and gas stocks are trading at much lower share prices at comparable oil prices because they are still too small to be taken into account by institutional investors or their larger money pools, the expert said. He therefore believes that an impending consolidation of the industry is likely and believes that the large oil companies may buy up the smaller ones. Investors would have an “unusual opportunity” to benefit from this by betting on undervalued stocks now.
Editorial team finanzen.net
This text is for informational purposes only and does not constitute an investment recommendation. finanzen.net GmbH excludes any claims for recourse.
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