by Bryan Perry
July 25, 2023
All through 2022, the energy sector was the standout performer, as the major averages were broadly lower over the same time frame. The sanctions on Russian oil, coupled with the economy rebounding from the pandemic and an anti-fossil fuel policy within the Biden Administration, provided a trifecta of catalysts for the energy patch, showing up in the form of energy companies reducing capex spending, initiating huge stock buy-backs, and hiking dividend payouts in both fixed and variable dividends.
The S&P 500 Energy Sector SPDR ETF (XLE) roared 130% higher last year, closing on a constructive pullback that had most energy bulls looking for a continuation of the rally as 2023 got under way.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
For a while, the bulls were right, as the energy sector rose by a little over 6% in January 2023, but from that point on, energy stocks were deeply impacted, especially during March as recession fears devoured many global markets, illustrated in the year-to-date chart below, showing a steep March sell-off.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The dominant narrative was that the market would almost assuredly retest the October 2022 lows, which would represent a correction on the order of around 15%, using the S&P 500 as the benchmark.
The 2022 rally in energy coincided with inflation spiking, along with the Fed desperately raising rates after their now-infamous “inflation is transitory” policy statement went up in smoke when core inflation hit 9.2% in June 2022. The CPI is now running at an annual pace of 3.0% as of June’s reading.
A big contributor to lower inflation is seeing oil and gas prices revisiting their March lows in June.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
In July, all that looks to be changing, as shares of the XLE have clearly broken the downtrend line going back to January. Leading the fresh upside move have been oil services stocks – companies that support the oil and gas industry, including energy exploration, transport, and the processing and delivery of energy assets to market. This subsector has seen price surges the past two weeks, trading up through its 200-day moving average like a hot knife through butter to challenge the previous 52-week high.
This stunning move has received little mention by the financial media, which has placed so much focus on AI. Such a breakout move by oil service stocks often precedes a larger move within the broader sector, especially at a time when a weak China has kept a lid on refiners and integrated oil and gas companies.
We have also seen a sudden change in price action of the refiners in the past two weeks, with the leading names all posting very bullish moves higher. And while the biggest oil majors are still near the low end of their respective trading ranges, they too are now firming up in what could be seen as a big reversal in the making, as investors grow more positive on the economy surviving the threat of recession.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
It seems like a majority of investors believe that our central bank interest rate hikes to fight inflation should keep a lid on global growth for the time being. And yet there is clear evidence from recent price action that some investors are positioning their portfolios for a rebound in energy stocks, lured by attractive valuations and signs the U.S. will continue to sidestep a downturn of any significant magnitude.
This month, UBS upgraded energy to “most preferred” status, citing dwindling supply and signs that a U.S. recession, if it comes at all, may be less severe than expected. “We don’t have a recession as our base-case scenario in the U.S., so we think there is scope for the laggards to catch up,” said David Lefkowitz, senior equity strategist at UBS Wealth Management. “Energy is at the top of that list.”
Also, analysts at TD Securities said oil production cuts from Saudi Arabia and supply reductions from OPEC+ “are likely to more than offset the surplus accumulated in the first half of 2023,” lifting the price of U.S. West Texas Intermediate (WTI) to $90 per barrel. That’s 16% higher than where WTI currently trades at $77 per barrel, which is already $10 higher than where it was trading in the last week of June.
So, just when no one was wanting to back up the truck and buy energy stocks, the latest move has investors believing this sudden surge is more of an oversold bounce than a new and sustainable uptrend emerging. It’s hard to say, but it makes one wonder if we’ve seen the low in inflation this year as the CRB Commodity Index rose above 308 and sits at a fresh 2023 high amid a weak dollar and high food inputs.
Bloomberg said last Friday: “Agricultural commodities, which account for more than 40% of the index, resumed the upward trend after prices for cocoa, corn, soybeans, and sugar increased on shortage fears. Also, the cost of wheat surged following Russia’s suspension of a shipping deal with one of the world’s biggest producers. WTI crude returned above $75 per barrel thanks to China’s pledge to roll out more policies, and natural gas soared above $2.7/MMBtu on expectations of stronger air conditioning demand.”
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
At present, there is only a 15% probability of a Fed rate increase at the September 20 FOMC meeting. Based on what is now happening with energy and commodities, that number could easily start moving north of 50% if oil, natural gas, and other commodity prices keep heading higher. That said, it might be time to consider energy stocks trading at steep discounts with their large fixed and variable dividends.
All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
China is “Losing its Mojo” Under Dictator-for-Life, Xi Jinping
Income Mail by Bryan Perry
A Rally in The Energy Sector Is Taking Shape
Growth Mail by Gary Alexander
Huge Boomer Assets Should Fuel More Market Growth
Global Mail by Ivan Martchev
The Broad Market Finds its Pulse
Sector Spotlight by Jason Bodner
Record Cash on Sidelines Says Millions Missed this Rally
View Full Archive
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Bryan Perry
SENIOR DIRECTOR
Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.
Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry
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