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Updated January 13th, 2024 at 11:28 IST

US energy stocks in spotlight amid escalating tensions in Red Sea

Since late October, the energy sector has faced a nearly 3% decline, in stark contrast to the broader S&P 500, which has surged 16% during the same period.

Business Desk
Energy stocks
Energy stocks | Image:Siemens Energy
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Amid a recent market rally that has lifted various sectors, US energy stocks find themselves lagging, prompting optimistic investors to anticipate a potential turnaround driven by upcoming earnings reports and escalating geopolitical tensions.

Since late October, the energy sector has faced a nearly 3 per cent decline, in stark contrast to the broader S&P 500, which has surged 16 per cent during the same period. 

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In 2023, while the S&P 500 posted a robust 24 per cent gain, the energy sector experienced a notable 4.8 per cent drop, ranking as the second-largest decline among S&P 500 sectors.

Despite positive trends in economically sensitive groups like banks and small-cap stocks, the energy sector has struggled, primarily due to a substantial downturn in oil prices. 

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US crude has witnessed a more than 20 per cent decrease since late September, hovering around $73 a barrel. Factors such as abundant supplies, especially in the US, and concerns about demand in China and Europe have contributed to this decline.

Investors are closely monitoring the potential for oil prices to rebound, with an emphasis on geopolitical events and potential OPEC actions impacting short-term prices. 

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The recent airstrikes by the United States and Britain on Houthi targets in Yemen, leading to changes in oil tanker routes in the Red Sea, triggered a 4.5 per cent jump in US crude prices, ultimately boosting the energy sector by 1.3 per cent.

Wells Fargo Investment Institute (WFII) strategists upgraded their rating on the energy sector to "favorable" from "neutral," projecting that "oil prices will bottom with the global economy and then finish the year higher." 

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The ongoing tensions in the Middle East and potential OPEC decisions on production are cited as influential factors.

Earnings reports from key energy companies, including SLB (formerly Schlumberger), Baker Hughes, and Marathon Petroleum, are eagerly awaited. 

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Although the energy sector is anticipated to post the worst full-year earnings performance in 2023, falling nearly 26 per cent, there is optimism for a 1.6 per cent increase in earnings in 2024. WFII highlights "historically cheap" valuations for energy shares, trading at around 10 times trailing earnings compared to the overall S&P 500's 22 times trailing P/E ratio.

Improved earnings trends, attractive valuations, and the potential for the energy sector to serve as a hedge in times of geopolitical tensions contribute to the positive outlook among investors. Greenwood Capital, for instance, is overweight on energy in its portfolios, holding shares in Conocophillips and Chevron. 

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However, despite these positive indicators, some investors, like Robert Pavlik of Dakota Wealth Management, remain cautious, expressing preference for other sectors such as industrials and technology due to uncertainties surrounding the US economy and the lasting impact of the Middle East conflict on oil prices.

(With Reuters Inputs)

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Published January 13th, 2024 at 11:28 IST

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