Energy stocks underperformed in 2023 due to supply being stronger than expected, while demand was muted due to softer economic growth in Asia and Europe. For next year, Maurice FitzMaurice, Fidelity’s energy sector portfolio manager, is bullish on the sector as he sees oil prices remaining high. Additionally, he expects increased investments in international and offshore production. 

While many are focused on the recent decline in oil prices, FitzMaurice believes that fundamentals support higher prices, and he points to low levels of CAPEX over the past decade as a major factor. Even though investment in production has recently increased, it will take years for it to come online and meaningfully impact supply. He predicts that US shale production will see slower growth due to higher costs and less productive wells, and OPEC will remain vigilant to support prices. 

In terms of subsectors, he favors energy equipment and services companies. He believes that more investment is required to meet the world’s need for oil, and higher levels of CAPEX should persist for multiple years especially given nearly a decade of underinvestment. Additionally, there is limited capacity in these subsectors which should result in significant pricing power and higher margins. In terms of which companies to target, he advises seeking out companies trading at discounted valuations, a healthy balance sheet, and a disciplined approach to capital allocation that has some sort of competitive advantage. 

Finsum: Fidelity’s energy sector portfolio manager shared his outlook for the sector next year. He is most bullish on energy services and equipment stocks due to the start of a multiyear investment cycle.