Key takeaways

  • Energy stocks finished 2023 in modestly negative territory, greatly underperforming the broader U.S. stock market.

  • Investors continue to find more opportunities in the fossil fuel marketplace compared to renewable energy companies.

  • Despite increasing geopolitical issues that could potentially upset world energy markets, oil prices remain relatively stable.

Investors who benefited from significant gains in energy stocks in two previous years experienced a vastly different environment in 2023. The S&P 500 energy sector declined 1.33% for the year ending December 2023. By comparison, the broader S&P 500 was up more than 26% for the year. 2023’s narrowly negative energy sector performance stood in sharp contrast to gains of 65.72% in 2022 and 54.64% in 2021.1 In recent history, energy sector performance exhibited significant volatility.

Chart depicts energy sector stock volatility 2013-2023.
As of December 29, 2023. Source: U.S. Bank Asset Management Group, S&P Dow Jones.

Energy stocks’ response to price trends

To some extent, energy stocks often respond to broader energy price trends. Rising energy prices tend to benefit energy-related stocks, and conversely falling prices can, at times, dampen investor enthusiasm for the sector. For example, in 2021 and 2022, oil prices trended higher, peaking at more than $120/barrel in 2022.2 That upward price trend seemed to propel the energy stock performance. But in 2023, oil prices were flat to lower, and energy stocks followed suit. Today, prices for various energy products are down significantly from 2022 peaks.

Energy prices slumped in 2023

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 November 22, 2023. All data retrieved from FRED, Federal Reserve Bank of St. Louis.

Category

2022 Peak Price

Recent Price

% Change

Crude Oil (barrel)

$123.64

$72.83

-41.1%

Gasoline (gallon)

$5.01

$3.06

-38.9%

Natural Gas (mil. Btu)

$9.48

$2.86

-69.8%

Heating Oil (gallon)

$5.15

$2.55

-50.5%

Category

Crude Oil (barrel)

2022 Peak Price

$123.64

Recent Price

$72.83

% Change

-41.1%

Category

Gasoline (gallon)

2022 Peak Price

$5.01

Recent Price

$3.06

% Change

-38.9%

Category

Natural Gas (mil. Btu)

2022 Peak Price

$9.48

Recent Price

$2.86

% Change

-69.8%

Category

Heating Oil (gallon)

2022 Peak Price

$5.15

Recent Price

$2.55

% Change

-50.5%

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 January 15-17, 2024. All data retrieved from FRED, Federal Reserve Bank of St. Louis.

What do prospects for the energy sector look like for 2024 and beyond? How should investors view opportunities in this specialized segment of the market representing a critical part of the global economy?

 

Energy’s shifting profile in the stock market

The energy marketplace is undergoing a transition. In the 1970s, when oil prices first started spiking in the wake of the Arab oil embargo and various Middle East conflicts, the energy sector represented approximately 15% of the broader U.S. stock market. Today, it makes up less than 4% of the S&P 500 index.1 “Those numbers might suggest that it is an industry in decline, but in reality, energy consumption is up since the 1970s, and the important role energy plays in the broader economy is not diminished,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “From an earnings (profit) perspective, energy stocks play a more prominent role in today's S&P 500.” Haworth estimates that close to 10% of the index’s earnings are generated by energy stocks.

“While an increasing number of firms are focused on renewable energy projects, the primary investment opportunities in the energy sector today are with more traditional participants such as oil and natural gas companies,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management.

World oil consumption continues to trend higher with the notable exception of a decline in 2020 as world economies slowed due to the COVID-19 crisis.3

Chart depicts world oil consumption 2018-2023.
Source: U.S. Energy Information Administration, “Short Term Energy Outlook,” Petroleum and Other Liquids Consumption, January 2024.

While energy stock performance is somewhat tied to the direction of oil prices, Haworth says bottom line results for companies can hold up even if oil prices don’t. “Prices have a major impact on companies that find and produce oil,” says Haworth “But oil refiners make money from the spread between oil prices and gasoline prices. Storage and transportation company earnings are more affected by the volume and flow of energy.” Haworth also points out that about one-third of the S&P 500’s energy sector is composed of natural gas companies, a market where pricing generally moves independently from oil price trends. Natural gas prices are driven more by domestic supply and demand rather than global market trends.

 

The slow transition in the energy sector

Renewable energy sources, particularly wind and solar, are slowly gaining a foothold in world energy production, but the role remains modest today. In the U.S., for instance, only about 21% of electricity generation comes from renewable sources (including wind, solar and hydroelectric power), with more than 60% still originating from fossil fuels (mainly natural gas and coal).4

Pie chart depicts energy sources that contribute to overall electricity generation in the U.S. in 2022.
Source: U.S. Energy Information Administration, “U.S. utility-scale electricity generation by source, amount and share of total in 2022.

On a worldwide basis, renewables represent less than 15% of all electricity production.5 “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.”

Efforts are also underway to reduce greenhouse gas emissions by converting fossil fuel-driven automobiles to electric vehicles (EVs), but it is a slow transition. Currently, EVs account for less than 10% of the U.S. car market.6 “Even as the world tries to transition to more EVs, oil demand will still be a factor going forward,” says Haworth. “For example, traditional forms of energy are still needed to power mining activities for minerals required to produce batteries used in electric cars.” Other industrial uses also require fossil fuels to generate sufficient power to meet their needs.

“While an increasing number of firms are focused on renewable energy projects, the primary investment opportunities in the energy sector today are with more traditional participants such as oil and natural gas companies,” says Haworth.

 

Recent trends put more pressure on oil stocks

Declining oil prices contributed to the energy sector’s underperformance in 2023. A barrel of crude oil was priced in the $80 range at the start of 2023, down considerably from 2022’s peak price of more than $120/barrel. By January 2023, the price hovered near $70/barrel.2 Haworth says the recent drop in oil prices, and consequently oil stocks, may be due in part to expectations of lagging demand should an economic downturn occur.

Speculation arose that energy prices could rebound when, in late 2023, Yemeni-based Houthi militants began attacking cargo ships on the Red Sea. These vessels use the Red Sea to access the Suez Canal, allowing much more efficient shipping between the Indian Ocean and the Mediterranean Sea. Cargo ships carrying crude oil are frequent targets, leading some shippers to divert traffic via much longer routes. However, oil prices remained relatively stable in the early weeks of the Red Sea attacks.

“Supply disruptions to this point have not been significant, and oil demand remains relatively soft, which is typical in the winter months,” says Haworth. “That explains in part why, despite rising tensions in the Middle East, we’ve seen relative stability in the oil market.”

While in the past the U.S. seemed more susceptible to geopolitical flareups, particularly in the oil-rich Middle East, that is less the case now as the U.S. is no longer a net importer of oil and other petroleum products.7

Chart depicts the U.S. net imports of crude oil and pretrolum porcuts.
Source: U.S. Energy Information Administration.

Investment considerations in today’s energy market

Money invested in the energy sector today is primarily directed toward more traditional companies that participate in industries like oil and natural gas. While the price of resources such as oil and gas can have an impact on company results and stock performance, Haworth emphasizes that opportunities can be found 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 many 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. Midstream companies tend to pay attractive dividends. However, the investment process can be more complex as it sometimes requires investments in limited partnerships. They require issuance of K-1 forms to investors for tax reporting purposes, which can complicate an investor's tax filing process.

Alternative investments such as renewables like wind and solar are less visible in the investment markets. Utility companies emphasizing renewable energy sources offer one opportunity to pursue this part of the market. Some manufacturers of wind or solar equipment also offer opportunities, but they are far more limited than more established, traditional energy companies.

Energy stocks will play a modest role for those who invest in an index fund or ETF replicating the S&P 500 Index. Beyond that, consider consulting with your financial professional to determine whether more targeted investments in the energy sector can help you meet your long-term financial goals.

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Disclosures
  1. Source: S&P Dow Jones Indices LLC.

  2. Energy Information Administration, “Crude Oil Prices: West Texas Intermediate (WTI) – Cushing, Oklahoma.”

  3. U.S. Energy Information Administration, “Short Term Energy Outlook,” Petroleum and Other Liquids Consumption, January 2024.

  4. U.S. Energy Information Administration, “U.S. utility-scale electricity generation by source, amount and share of total in 2022.

  5. The Energy Institute, “Statistical Review of World Energy 2023.”

  6. Voelcker, John, “EV Sales Are Just Getting Started,” Car and Driver, Jan. 13, 2024.

  7. U.S. Energy Information Administration, “U.S. Net Import of Crude Oil and Petroleum Products,” through October 2023.

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