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Energy Sector Rating: Marketperform

By

Brad Sorensen

Brad Sorensen
CFA, Managing Director of Market & Sector Analysis, Schwab Center for Financial Research

Brad Sorensen heads market and sector analysis for the Schwab Center for Financial Research and writes for several Schwab publications. He is a member of Schwab's Investment Strategy Council.

Before joining Schwab in 2004, he was a senior analyst at AMG Guaranty Trust, where he designed portfolio strategies for high-net-worth individuals. Sorensen graduated from the University of Colorado with a bachelor's degree in finance and master's degrees in business administration and finance. He is a Chartered Financial Analyst charterholder.

February 22, 2018

Member for

4 months 1 week
Submitted by Eric Wilson on Thu, 02/22/2018 - 00:09
Energy Sector

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

The energy sector had been moving higher but took a pretty sharp hit from the recent pullback and has been the worst performing group over the past month. This is part of the reason why we have kept a market weighting on the group—it can be fairly volatile and change direction pretty quickly. The International Energy Agency also recently stated that U.S. shale production is growing even faster than it did during the time period when oil was trading at over $100/barrel, noting that shale producers “cut costs dramatically” during the downtrend in oil prices. This illustrates why we’re still concerned that the discipline shown on the supply side both with OPEC and here in the U.S. won’t last as companies and countries chase profits.

We admit to being more cautious than others with regard to the energy sector, but we also don’t think it’s time to go to underweight. Despite the recent downturn, there remain bullish developments and should discipline emerge as oil moves below $60/barrel, we would consider upgrading the group. To be sure, 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—for now.

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.

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