Energy Sector Lags Again, but What’s the Outlook?
ETF data story for the week of July 10 to 14, 2023 in Canada.
Energy stocks outperformed the broader U.S. stock market in 2022, ending the year 59.4% higher than it started, according to data from S&P Dow Jones Indexes. Against a backdrop of geopolitical tensions and supply threats, this growth was clearly driven by rising demand amid the economic recovery from the pandemic and supply constraints exacerbated by the war in Ukraine.
By contrast, the first half of 2023 proved a tough period for the energy sector amid continued concerns of lower demand for oil, and the lack of recovery in China as evidenced by dwindling exports and imports. The country's stagnant growth fuels deflation, exerting a significant influence on the crude oil market.
The WTI crude oil price thus dropped from US$80.26 a barrel to US$75.42, down 7.97% year-to-date (as of 14 July). As a result, this makes the S&P energy sector the worst performer within the S&P 500 index in 2023 so far, down 7.34% year-to-date while the benchmark index is up 17.34%.
Saudi Arabia and Russia, the world's biggest oil exporters, have just made the decision to further curtail their output for the month of August. And yet, meanwhile, the U.S. Energy Information Administration (EIA) recently published its short-term energy outlook. According to their report, demand is expected to exceed supply by 100,000 barrels per day in 2023, with this gap widening to 200,000 barrels per day in 2024.
Could these developments lead to a trend reversal? As traders and investors expect further rate hikes around the globe, which could possibly trigger a global recession, supply reductions could well be tempered by lower levels of demand than initially anticipated. Furthermore, it’s worth noting that the recent rebound in WTI crude oil prices (+6.77% over the last two weeks) could also be a result of the weakening of the U.S. dollar (dollar index down 2.88% in July).
This may explain why the US S&P energy sector lagged again this past week (up 0.58% while the S&P 500 jumped 2.42%), highlighting investor caution. In Canada, the Energy sector which includes seven Canadian ETFs was up 0.85% bringing its year-to-date performance to -3.96%.
Group Data
Funds Specific Data: XEG, ZEO, ENCC
Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.
