Energy sector-related exchange traded funds have stood out for most of 2022, but oil producers lost their momentum in June.
The Energy Select Sector SPDR (XLE) declined 17.5% over the past month, but the ETF was still up 31.4% year-to-date.
Energy stocks were the worst-performing group in the S&P 500 Index for the past five sessions, but they were slightly higher Friday. Meanwhile, Bloomberg reports that the S&P 500 Energy Sector index was down 18% since the start of last month, compared to a 6% drop for the S&P 500. Energy stocks were even underperforming the 9% decline in West Texas Intermediate crude oil futures.
Nevertheless, the energy sector remains the lone S&P sector to remain in the green this year after outperforming the broader market for 20 months through May.
Energy stocks are now under pressure after the US Energy Information Administration revealed crude oil storage data that was “negative for the oil complex,” with an unexpected build of 8.2 million barrels, MKM Partners analyst Leo Mariani said in a note. The figures are “bearish for crude over the longer term” because they imply “that the market is oversupplied,” he added.
The sudden oversupplied state of the market marks a quick turnaround from spring when the global market faced tight supplies, reopening economies from Covid-19 shutdowns and the Russian invasion of Ukraine.
The potential for an economic recession also dealt a blow to the energy market as a slowdown in growth would translate to diminished crude oil demand.
On the other hand, oil markets may find some support from the reopening of China’s economy from its severe Covid-19 restrictions and stimulus plans.
“I think we’ve got a few choppy months, but China is re-flating,” Stifel portfolio strategist James Hodgins told Bloomberg, adding that energy could reach a “bottom by the fall.”
The sector also trades at relatively low valuations. “I do think it got too hot, too fast, but these companies are still really, really cheap,” Brompton Group chief investment officer Laura Lau told Bloomberg.
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