TOPPLING TECH
Energy stocks are on pace to be the best-performing group in the S&P 500 this quarter,
Energy stocks are on pace to be the best-performing group in the S&P 500 this quarter, after oil prices broke through $70 a barrel, a level they’ve struggled to reach and stay above for almost four years.
Energy companies have rallied 12 per cent — poised for the biggest quarterly gain since 2016 and to be the top sector out of the 11 in the S&P 500. The broader equity gauge is set to eke out a 2.2 per cent gain in the second quarter.
Oil prices have jumped amid signs of falling global supply. This week’s move higher in crude comes after an Organization of the Petroleum Exporting Countries’ agreement on Friday to increase global production by an amount below what many expected. The decision sent oil prices surging, up 6.1 per cent over four days. Harsh rhetoric from the Trump administration on Iran sanctions and a surprising drop in U.S. crude inventories this week also lifted prices, while production from Venezuela has been plummeting for months as the country sinks deeper into economic turmoil.
West Texas Intermediate, the benchmark for U.S. crude, settled Wednesday at $72.76 a barrel, the highest level since November 2014. The energy sector’s performance has historically been linked to the price of oil.
“The pendulum has swung,” said Bill Costello, senior portfolio manager at Westwood Holdings Group. Investors went from being “not willing to touch (energy) to being bullish.”
Energy hasn’t been the S&P 500’s top sector since the second quarter of 2016, when energy companies were recovering from a two-year rout triggered by shale producers in Texas and North Dakota unleashing supply into the market. Meanwhile, technology companies, favoured by investors in recent years, have been harder hit recently by rising trade tensions between the U.S. and China.
China is targeting crude oil in its retaliatory tariffs on U.S. imports, but the broader ramifications for energy demand are a bigger concern for investors, said Quincy Krosby, chief market strategist at Prudential Financial Inc.
“The question becomes how much of a slowdown we’re going to see, if any,” Ms. Krosby said. “That also translates into how much energy use we’ll see.”
Oil producers and pipeline operators are considered cyclical companies, meaning they’re sensitive to economic conditions and their businesses tend to ramp up when growth is ro- bust. A trade war between the U.S. and China — the world’s two biggest economies — could hurt global energy demand.
Federal Reserve Chairman Jerome Powell said this month that businesses were increasingly expressing concerns to the central bank about how a trade war might affect plans for investment and hiring.
Investors have preferred some energy companies over others. Petroleum refiner HollyFrontier Corp. has rallied 36 per cent. Refiners tend to be better insulated from swings in oil prices. Meanwhile, shares of Concho Resources Inc., a major producer in the Permian Basin, have declined 8.4 per cent this quarter as bottlenecks like congested pipelines weigh on regional crude prices.
“People are being very selective of the energy names they want,” said Mr. Costello.
Nonetheless, given the fresh highs in oil prices, analysts expect a strong earnings season from energy companies. The group has seen the largest increase in earnings estimates out of any sector since the start of the quarter, according to analysts surveyed by FactSet. Twenty-two of the 31 companies in the group had an increase in their average earnings estimate.
Energy firms have also boosted their dividends this year. Investors in the S&P 500 energy sector earn a 2.69 per cent dividend, according to FactSet data as of Monday, compared with a 1.83 per cent rate for the S&P 500 as a whole.
While bond yields have risen as the Fed hikes interest rates, diminishing the lure of dividend-yielding stocks, many of these energy companies are still attractive to income-seeking investors, said JJ Kinahan, chief market strategist at TD Ameritrade Holding Corp.
Traders are “trying to figure out how to position those stocks in the face of all these factors changing quickly,” Mr. Kinahan said.
Given the fresh highs in oil prices, analysts expect a strong earnings season from energy companies