(Bloomberg) — The high-octane rally in energy stocks over the last two years looks to be fuming out as investors turn their focus to riskier, higher growth corners of the equities market.
Most Read from Bloomberg
After besting the broader market for two consecutive years, the S&P 500 Energy Index has started 2023 among the worst-performing of the S&P 500’s 11 main sectors, alongside utilities and health care. The energy gauge has slipped 4% year to date, underperforming the broader benchmark by 8 percentage points as investors have bought into growth stocks in the hard-hit tech sector, on expectations the Federal Reserve may soon pause its aggressive interest rate-hiking campaign.
A big contributor to energy’s paltry performance has been the slide in oil and gas commodity prices amid a collapse in demand to the point where recently boosted dividend payments look vulnerable to cuts. Natural gas prices have been hardest hit, collapsing from above $6 in December to just $2.11 per thousand cubic feet on Tuesday. Oil prices have been rangebound between roughly $70 and $80 a barrel for the last three months.
The heady days of 2022 when investors could earn returns by simply buying the Energy Select Sector Index have ended given “meandering oil markets,” said Stacey Morris, head of energy research at VettaFi, adding that “natural gas has been extremely weak.”
Energy indexes are weighted by market value, so companies like ConocoPhillips and Chevron Corp., two of the three largest energy companies in the US, heavily influence the sector, Morris said. Both have had startlingly poor performances so far this year, falling 11% and 10%, respectively.
However, “I wouldn’t write off energy for the year two months in,” she said.
There are a few pockets of the energy sector that are still climbing — drilling and oil field services stocks rose after energy producers increased their spending plans. The Philadelphia Stock Exchange Oil Service Sector Index is up 3.7% this year.
Given how commodity prices have begun to skid, drilling budgets may be trimmed and that could be exactly what the sector needs.
“Ultimately, the quicker the industry pulls off the band aid on gas directed drilling the sooner stocks (not the commodity) may start to find a bottom,” Tudor Pickering Holt analyst Matt Portillo wrote in a Tuesday research note.
–With assistance from Matt Turner.
Most Read from Bloomberg Businessweek
©2023 Bloomberg L.P.