Key takeaways

  • Energy stocks continue to face headwinds in an environment where oil supplies outpace demand.

  • Since early September, oil prices have hovered below the $70/barrel level.

  • Performance for the energy sector over the past 3-year and 5-year periods remains strong.

Year-to-date, the S&P 500 energy sector gained 17.64%, nearly half of this coming between October 1 and mid-November. This represents a marked improvement over a net loss of more than 1% for the sector in 2023.1 Even so, energy stocks still lag the broader S&P 500, which is up more than 25% in 2024.

Chart depicts energy sector stock volatility 2013- November 18, 2024.
*As of November 18, 2024. Source: U.S. Bank Asset Management Group, S&P Dow Jones.

On the strength of standout performance in 2021 and 2022, the energy sector is up more than 20% per year for the three-year period ending October 2024, and 14.6% per year over the previous five years.1

 

How energy stocks respond to price trends

Energy prices peaked in 2022 amid a rapid demand surge as COVID-related shutdowns ended and supply constraints emerged tied to the onset of the Russia-Ukraine war. Prices declined significantly since. Energy sector performance soared in 2021 and 2022, a response to higher oil prices.

“The oil market is one that remains well supplied but isn’t well demanded,” says Rob Haworth, senior investment strategy director for U.S. Bank Asset Management. “Although the U.S. economy is strong, other major oil users like China and Germany are experiencing economic challenges. As a result, global demand is lagging.”

In 2023, oil prices were flat to lower, and energy stocks followed suit. Oil prices moved above $80/barrel by mid-March 2024, then held between $70 and $80/barrel for much of 2024’s summer months but have hovered in the $70/barrel range or lower since September.2 Prices for all key energy products remain significantly lower than 2022 peaks.2

The recent energy price slump

All prices published by U.S. Energy Information Administration. Crude Oil Prices: West Texas Intermediate (WTI) – Cushing, Oklahoma. Gasoline: U.S. Regular All Formulations. Natural Gas: Henry Hub Natural Gas Spot Price. Heating Oil: No. 2 Heating Oil Prices: New York Harbor. Recent price is the latest prices reported as of March 1 to 11, 2024. All data retrieved from FRED, Federal Reserve Bank of St. Louis.

Category

2022 Peak Price

2023 End Price

Recent Price

% Change from Peak

% Change Year-to-Date

Crude Oil (barrel)

$123.64

$71.89

$68.43

-44.7%

-4.8%

Gasoline (gallon)

$5.01

$3.12

$3.05

-39.1%

-2.2%

Natural Gas (mil. Btu)

$9.48

$2.53

$1.92

-80.5 %

-24.1%

Heating Oil (gallon)

$5.15

$2.44

$2.10

-59.2%

-13.9 %

Category

Crude Oil (barrel)

2022 Peak Price

$123.64

2023 End Price

$71.89

Recent Price

$68.43

% Change from Peak

-44.7%

% Change Year-to-Date

-4.8%

Category

Gasoline (gallon)

2022 Peak Price

$5.01

2023 End Price

$3.12

Recent Price

$3.05

% Change from Peak

-39.1%

% Change Year-to-Date

-2.2%

Category

Natural Gas (mil. Btu)

2022 Peak Price

$9.48

2023 End Price

$2.53

Recent Price

$1.92

% Change from Peak

-80.5 %

% Change Year-to-Date

-24.1%

Category

Heating Oil (gallon)

2022 Peak Price

$5.15

2023 End Price

$2.44

Recent Price

$2.10

% Change from Peak

-59.2%

% Change Year-to-Date

-13.9 %

All prices published by U.S. Energy Information Administration. Crude Oil price per barrel: West Texas Intermediate (WTI) – Cushing, Oklahoma as of Nov. 12, 2024. Gasoline price per gallon: U.S. Regular All Formulations as of Sep. 18, 2024. Natural Gas price per million BTU: Henry Hub Natural Gas Spot Price as of Nov. 12, 2024. Heating Oil price per gallon: No. 2 Heating Oil Prices: New York Harbor as of Nov 12, 2024.

“Part of the reason energy stocks are doing well even though oil prices are down is that global natural gas prices are up,” says Haworth, senior investment strategy director with U.S. Bank Asset Management. Unlike the oil market, where prices move on a global level, natural gas prices are affected by regional factors. Europe’s demand for liquid natural gas to offset supply disruptions from Russia may be contributing to the trend. Natural gas companies make up roughly one-third of the S&P 500 Energy index.1

 

Record U.S. oil production

The U.S. is now the world’s largest oil producer, with current production reaching record levels.3 Supply interruptions occurred worldwide as Oil Petroleum Exporting Countries+ (OPEC+) trimmed production levels to boost oil prices. However, increased U.S. oil production helped overcome potential supply shortfalls. The U.S. has moved from a net importer to net exporter of oil.4

Chart depicts U.S. Net Imports of Crude Oil and Petroleum Products by Thousands of Barrels/Day: 1974 - 2024, as of November 8, 2024.
Source: U.S. Energy Information Administration. As of November 8, 2024.

“The oil market is one that remains well supplied but isn’t well demanded,” says Haworth. “Although the U.S. economy is strong, other major oil users like China and Germany are experiencing economic challenges. As a result, global demand is lagging.”

Nevertheless, oil consumption worldwide is still on the rise, though the pace of growth has slowed.5

Chart depicts actual and projected daily global oil consumption: 2018-2025.
Source: U.S. Energy Information Administration, “Short Term Energy Outlook,” Petroleum and Other Liquids Consumption, November 13, 2024. *Projected consumption.

President-elect Donald Trump has promoted stepped-up domestic drilling to expand available supplies, but it isn’t clear how aggressive oil companies may be. “In recent years, oil companies focused on repaying capital in the form of dividends to investors or paying down debt,” says Haworth. “Before adding more oil rigs, which are expensive, companies want to know they can produce oil at a cost that justifies stepped-up production.”

 

Role of energy stocks

In the 1970’s, the energy sector represented approximately 15% of the broader U.S. stock market. Today, it makes up just 3.4% of the S&P 500 index.1 “Yet energy consumption is up since the 1970s, and the important role energy plays in the broader economy is not diminished,” says Haworth. “From an earnings (profit) perspective, energy stocks play a more prominent role in today's S&P 500 than their index weighting would indicate.”

 

A gradual shift to renewables

Renewable energy sources such as wind and solar are part of the energy picture today as efforts are made to reduce fossil fuels’ carbon footprint. But renewables make up less than 25% of U.S. electricity generation.6

Pie chart depicts energy sources that contribute to overall electricity generation in the U.S. as of August 2024.
Source: U.S. Energy Information Administration, “Electric Power Monthly,” Year-to-date generation as of August 2024.

“Alternatives like wind and solar are not a factor in the S&P 500 Energy Index to this point,” says Haworth. “In some cases, they may be represented in other sectors of the market, such as utilities or information technology.”

 

Investment considerations in today’s energy market

Investments in the energy sector today are primarily directed toward more traditional companies that participate in industries like oil and natural gas, with only limited alternative energy opportunities. “The demand for fossil fuels is not going away in the near term,” says Haworth. He emphasizes that opportunities are available even in a market featuring more stable prices. “Many exploration and production companies have productive oil wells and should be able to generate solid profit margins,” says Haworth. “Since these companies tend to return capital to shareholders in the form of dividend payouts, their stocks represent an opportunity for income-orientated investors.”

Other opportunities can be found in what’s referred to as the midstream energy sector, involved in the transportation of crude oil or refined petroleum products. “This sector is less dependent on energy prices than on the flow of oil, and volume moving through these facilities remains high,” says Haworth. Midstream companies tend to pay attractive dividends. However, the investment process can be more complex as it sometimes requires investments in limited partnerships. Partnerships issue K-1 forms to investors for tax reporting purposes, which can complicate an investor's tax filing process.

Consider consulting with your financial professional to determine whether targeted investments in the energy sector can help you meet your long-term financial goals.

Frequently asked questions

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Disclosures

  1. S&P Dow Jones Indices. Returns as of November 18, 2024.

  2. Energy Information Administration.

  3. U.S. Energy Information Administration, “U.S. energy production has increased faster than energy consumption over the past 50 years,” Oct. 29, 2024.

  4. U.S. Energy Information Administration, “U.S. Net Imports of Crude Oil and Petroleum Products,” as of Nov. 13, 2024.

  5. U.S. Energy Information Administration, “Short Term Energy Outlook,” Petroleum and Other Liquids Consumption, November 13, 2024.

  6. U.S. Energy Information Administration, “Electric Power Monthly, Net Generation by Energy Source,” as of August 2024.

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