Liz Looks at: The Energy Sector

By: Liz Young · June 08, 2023 · Reading Time: 5 minutes

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It’s not new news that the Energy sector has had a rough go of it in 2023 — it’s currently the worst performing sector in the S&P with a -7.6% YTD return. Nor is it new that this pullback is in stark contrast to the outstanding performance of 2022, when Energy led the index and posted a 60% gain.

But what may be a newer takeaway is that despite some of the forces that served as tailwinds last year still being present (more on those below), if not stronger, oil prices and energy stocks have failed to hang on to their rally attempts in 2023 (another of which we are in the midst of right now).

Given that Energy is one of the most cyclical sectors in the market, ongoing fears of a slowdown both here and abroad are likely weighing on the price of oil and energy stocks. Although a soft landing remains in the realm of possibility, the general mood this year has become much more cautionary, if not edgy, about when a recession may begin.

However, some external forces that would be expected to support the price of oil haven’t really done their job. Namely, the possibility that the Biden administration will begin refilling the Strategic Petroleum Reserve (SPR) now that the Debt Ceiling has been lifted, along with Saudi Arabia’s one-million-barrel production cut.

Oil prices popped slightly on both of those headlines, but reversed course, and remained in this muted range. If we do see the administration start refilling the SPR, this picture could change, but so far there hasn’t been much movement.

Jumper Cables

Energy stocks can frequently behave differently from oil as a commodity, which makes the sector both challenging and interesting to analyze. One of the forces that can cause stock prices to diverge from oil prices is how companies choose to use their excess cash.

Without getting into a political debate about what energy companies should do with their cash, the chart below shows the increasing trend of returning money to shareholders in the form of dividends and buybacks over the last year.

This served as a persistent jumpstart to energy stocks in 2022, but despite the continued increases, investors haven’t shared the same buying appetite.

I see this as having two possible explanations: 1) Perhaps it’s similar to oil prices in that investors are dealing with economic uncertainty and shunning cyclicals; or 2) last year’s volatile equity market didn’t offer many attractive opportunities, so shareholder-friendly energy stocks were rewarded.

Cheaper Charge

Despite the fact that investors haven’t benefited much from Energy this year, consumers certainly have. The most direct impact being at the pump, with average regular gasoline prices down to $3.55/gallon from the peak of $5.00/gallon last summer.

Energy costs in general are no longer contributing to inflation pressures either. In a time when we worry about the ability of consumer spending to drive growth, the less consumers have to spend on Energy, the more they can spend on other things.

Nevertheless, the cross currents and mixed messages remain. What should be supportive of oil prices and energy stocks hasn’t had much effect. The forces of global economic uncertainty seem to be stronger than the other drivers at play, and Energy is serving as a signal in markets that we’re not sure we can rely on strong demand to pull us through yet.

Until we have a clearer view of the global economy, this may stay in the “range bound” category with other cyclicals…and test our patience.


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