Written by Nick Ackerman, co-produced by Stanford Chemist. This article was originally published to members of the CEF/ETF Income Laboratory on December 10th, 2022.
We are coming closer to the end of the year, and a trend that began last year has carried on through 2022. That was the energy sector being the strongest performing. This was after it was the worst performing in five of the seven years between 2014 and 2020. In 2021 it came back with a vengeance, and this year it is one of the only sectors that has stayed positive. At the time of writing, it looks like consumer staples have slipped back into negative territory slightly for the year. Utilities are also only slightly negative on a YTD basis.
Although the energy sector had gone through its own bear market earlier in 2022, it was hard to notice as it had stayed positive the whole time through. More recently, things have been trending down again as the outlook for 2023 continues to remain uncertain. The only certainty we seem to be getting is that there is going to be a recession; the depth and duration are unknown.
That being said, I believe there are a few things that can help benefit the sector in the short term. I’ve outlined them previously and will reiterate them once again here.
While I would be hesitant to invest in more energy too aggressively, considering the expectations for a recession next year, I believe the sector has a couple of things going for it. First, China shouldn’t stay in lockdowns from COVID forever. If and when they open, demand for oil/natural gas and whatever other fossil fuels are used for energy could increase.
Secondly, OPEC seems more committed to helping support the current price after announcing production cuts several months ago. This was because they anticipated weak demand coming from weaker economies after central banks began raising interest rates aggressively. I believe this was a change in stance from back in 2015 when OPEC was more than content to keep pumping to drive out U.S. producers.
Thirdly, oil companies in the U.S. don’t seem interested in investing heavily in bringing up production. Instead, they are providing more returns to shareholders and staying highly profitable. Rig counts have been growing but at a relatively slower pace.