Tuesday, 16 April 2024 04:11

Energy Stocks Outperforming

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The Energy Select SPDR ETF (XLE) is up 14% YTD, which is the second-best performance among sectors. This follows a year of underperformance in 2023 due to concerns of a recession impacting energy demand, while strong US production offsets the impacts of OPEC cuts. Last month, OPEC announced that production cuts of 2.2 million barrels per day would continue in the second quarter.

This year, oil prices have risen due to increased tensions in the Middle East. Additionally, recent economic data has clarified that the US economy is not near a recession, and there are some indications of a pick-up in economic growth. The near-term macro picture looks bullish for energy stocks given increased demand, tighter supply, and intensifying geopolitical tensions. On the supply side, OPEC has demonstrated discipline in terms of members abiding by agreed-upon production cuts, and US production is expected to not increase further.

Given valuation concerns about many parts of the market, energy stocks are also cheap, trading at 13 times expected earnings vs. 21 for the S&P 500. XLE also pays a 3% yield, which is more than double the S&P 500’s yield of 1.4%. Further, historical research shows that energy stocks have posted the best performance in high-rate environments, which is likely to persist for longer given recent economic data. 

Finsum: Energy stocks have had a strong start to 2024. Recent economic data is supportive of increased demand, while the supply side is being impacted by OPEC cuts and heightened geopolitical tensions. 

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