Red Sea tensions put focus on struggling U.S. energy stocks
By Lewis Krauskopf
NEW YORK (Reuters) — A recent rally that has boosted nearly every corner of the U.S. stock market has left energy shares behind, and bullish investors are betting upcoming earnings reports and rising geopolitical tensions could spark a rebound for the struggling group.
The energy sector has slumped nearly 3% since late October, a period during which the S&P 500 has surged 16%. The benchmark index rose 24% for all of 2023, while energy fell 4.8%, the second-largest drop last year among S&P 500 sectors.
The sector's struggles have continued even as other economically sensitive groups such as banks and small-cap stocks have benefited from investors' growing belief that the economy will be able to navigate a «soft landing» where growth remains stable while inflation subsides.
One key reason for the sector's underperformance has been a sharp downturn in oil prices. U.S. crude is down over 20% since late September, to around $73 a barrel, pressured by strong supplies, particularly in the U.S., and concerns about tepid demand in China and Europe, investors said.
«Right now, oil prices have been… leading the stocks,» said Matthew Maley, chief market strategist at Miller Tabak. «So if oil prices can break out a little bit from here, which would catch people a little off guard, this energy group is going to start playing catch up real quick.»
Strategists at the Wells Fargo Investment Institute (WFII) this week upgraded their rating on the energy sector to «favorable» from «neutral,» saying «oil prices will bottom with the global economy and then finish the year higher.»
A potential rise in Middle East tensions and any OPEC actions on production are factors that could influence near-term oil prices.
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