Energy Sector Rating: Marketperform

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

Members of OPEC recently decided to extend their agreed to cuts through 2018, although the decision will be reviewed in June of 2018. Although widely expected, we are starting to question whether the recent discipline among OPEC member can last.  Budgets have to be met and leaders in some of these countries rely on oil revenue to offer “goodies” to their populations in order to keep domestic peace.   In the US, oil producers have also shown signs of discipline as of late, with the domestic rig count turning modestly lower  but that also is in question as costs of production continue to be driven down according to major oil companies during their last quarterly reports and the rig counts have started to turn back up.  All of this has resulted in what we would call a cautious rally—energy shares have moved generally higher but still lag the gains in the price of oil.  Historically, those two things have converged. The question now is will the energy sector catch up to oil or will oil fall to match energy? We believe it will be a mix but weighted toward the latter.

However, there are two sides to the oil story, supply and demand, and 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.

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.

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Important Disclosures

Schwab Sector Views do not represent a personalized recommendation of a particular investment strategy to you. You should not buy or sell an investment without first considering whether it is appropriate for you and your portfolio. Additionally, you should review and consider any recent market news.

Performance may be affected by risks associated with non-diversification, including investments in specific sectors. Each individual investor should consider these risks carefully before investing in a particular security or strategy.

All expressions of opinion are subject to change without notice in reaction to shifting market and other conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Companies within the energy sector may be significantly affected by energy prices, supply and demand for energy fuels, the success of exploration projects, government regulations and other factors.