Oil stocks have emerged as the top performers in the market this summer, and experts suggest that they have the potential to maintain their momentum for the remainder of the year. While technology stocks have taken a back seat, the Energy Select Sector SPDR exchange-traded fund (ticker: XLE) has outshined all other sectors since the start of June, boasting a 17% increase during this period. In comparison, consumer discretionary and industrials sectors trail behind with respective gains of 12%. These three sector rallies not only reflect an optimistic investor sentiment towards the U.S. and global economy but also indicate that the market is factoring in peak benchmark interest rates.
Energy stocks have other factors working in their favor as well. Crude oil and natural gas prices have experienced an uptick due to various developments on the supply side. Russia and Saudi Arabia continue to implement voluntary production cuts, while there is a looming threat of strikes by workers at liquefied-natural-gas plants in Australia, which could lead to a decrease in supply. Since June 1, the U.S. crude oil price has surged by 19%, reaching approximately $81 per barrel, while the natural gas price has increased by 17%, reaching $2.80 per million British thermal units.
According to BofA Securities commodity strategists, reductions in supply and the anticipation of peak rates have been key drivers behind the recent surge in energy prices. Nevertheless, a further boost in oil prices would require signs of improving demand, which may be uncertain at present due to China’s faltering recovery.
The rising oil prices have significantly impacted energy stocks, and the trend suggests that there is more to come. Earlier this year, less than 15% of energy stocks in the S&P 500 index were performing above their 200-day moving averages. However, thanks to the recent rally, this figure has surged to over 90%. Historical data analyzed by Dean Christians, senior research analyst at SentimenTrader, reveals that in 21 out of 25 instances when such a dramatic shift has occurred, the energy sector has experienced higher returns six months later. Although there may be minor fluctuations along the way, it is worth noting that the median gain for energy stocks six months after this type of shift has been 10%.
Overall, energy stocks continue to dominate the market and show promising potential for the future. With a strong performance and positive market indicators, investors are keeping a close eye on this sector.
Oil Exploration-and-Production Companies: The Ideal Investment Opportunity
Oil exploration-and-production companies present an enticing investment opportunity when compared to refiners, oil-field services providers, and other energy-related firms. It’s not just because of the higher price of the commodity they extract from beneath the ground. This year and the next, many producers are experiencing a decline in operating costs and capital expenditure requirements as pandemic-related supply-chain and labor pressures ease. Consequently, investors can expect higher cash returns, as demonstrated during the second-quarter earnings season.
J.P. Morgan analyst Arun Jayaram highlights a crucial lesson learned from the 2Q23 E&P earnings: a comeback for U.S. shale is in the works. He emphasizes that strong quarterly results were driven by better-than-expected well productivity trends, impressive drilling efficiency gains, and deflationary tailwinds that will enhance capital efficiency in 2024.
In light of these developments, Jayaram has upgraded shares of Pioneer Natural Resources (PXD), a prominent independent shale oil and gas producer focused on West Texas’ Midland Basin, from Neutral to the equivalent of Buy. He predicts that the company will increase its oil production by at least 5% next year without any additional capital expenditures. Pioneer has already embarked on a path of productivity and efficiency gains. During its second-quarter call, management raised its 2023 oil-production guidance by 1.2% while simultaneously lowering its capex forecast by 3%.
Nitin Kumar, from Mizuho Securities USA, also holds Pioneer as one of his top picks. He recently upgraded Chevron (CVX), Matador Resources (MTDR), and Permian Resources (PR) to Buy, while downgrading Marathon Petroleum (MPC), HF Sinclair (DINO), and Magnolia Oil & Gas (MGY) to Neutral. Kumar explains that although near-term refining margins may be strong, the risk/reward balance leans towards the downside, leading him to adopt a more cautious stance.
For investors seeking lucrative opportunities, it is wise to stick with shares of companies actively involved in extracting the valuable substance known as oil.
