The Zacks Market Outlook Nov ’22 – Energy

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Let’s review the current Energy Market Outlook to power your investment portfolio with Zack Research.

Indeed, Energy is at the heart of development. Energy makes possible the investments, innovations, and new industries that are the engines of jobs, inclusive growth, and shared prosperity for entire economies.

What Rapidly Shifting Energy Markets Mean for Your Investment Strategy ?

The last few years offer a case study of how quickly energy markets can shift.

In 2020, the pandemic and ensuing shutdowns and restrictions saw oil demand plummet, sending prices into negative territory for a brief period. Margins for oil producers fell to multi-decade lows, and S&P 500 energy stocks fell by a third that year as earnings plummeted.

Prices rebounded in 2021, however, and then shifted into overdrive in 2022 due to supply constraints tied to the war in Ukraine, which sent the price of a barrel of crude oil above $100 a barrel. S&P 500 Energy stocks rebounded +54.6% in 2021 and are up +34.9% in the first three quarters of 2022.

Contents:

Sector Ranks

According to the Zacks Rank S&P500 Sector Picks, Energy stays the top sector, remaining firmly at Very Attractive. Tops are Oil Misc. industries, Oil & Gas Exploration and Production (E&P), and the big Integrated plays:

Zacks industry portfolio rating - energy

Fossil Fuels

Energy consumption and production contribute to two-thirds of global emissions, and 81% of the global energy system is still based on fossil fuels, the same percentage as 30 years ago.
A recent rebound in economic activity led to a roughly 4% increase in global energy demand, much of which was met by fossil fuels. The spike in energy prices in the second half of 2022, followed by the Russian Federation’s invasion of Ukraine in early 2022, contributed to an unprecedented global energy crisis and commodity shock.
Overall 2022 Status: The energy sector tends to perform well in an inflationary environment. Revenues of energy stocks are dependent on energy prices, a key factor of inflation indices. The operating backdrop of the sector, too, is bullish. Oil prices have been rising since the beginning of 2022.

Q3 2022 Prices: The energy index rose 1.8% sequentially in October after a decline of 2.1% in September. Fuel oil marked a considerable gain in the month. The upside in crude oil prices was triggered by factors like easing COVID-19 concerns, supply shortages, and geopolitical tensions in energy-rich Eastern Europe and the Middle East.
Overall U.S. oil production is currently closing in on all-time highs. In August, U.S. oil output rose to 12 million barrels per day, which is just one million barrels a day shy of a record.
Most warnings dealing with energy have said that a crisis is looming, but markets have been moving in the opposite direction. Oil and gas supplies have been growing, not dwindling.

2023 Forecast: we cannot assume oil and gas prices are going to remain stable or rise going forward from here. Current trends indicate the opposite – elevated prices incentivize more production, as we’re seeing now with near-record oil and gas production in the U.S.
Bringing on more supply is good from a consumption and manufacturing standpoint, but it also moves global supply and demands back into balance – which could ultimately pressure prices lower. Being heavily overweight to Energy when oil and gas prices are falling is not where an investor wants to be.

For investors: Rapid shifts in the energy markets should be expected, but they should not mean rapid shifts in your portfolio positioning. Since earnings for oil and gas companies are impacted by price more than anything else, and since we know prices can be wildly volatile and largely unpredictable, I think it’s wise not to have Energy exposure too much higher or too much lower than your benchmark. There is simply too much risk that prices will move in a direction that runs counter to your wager.

ETF Portfolios: Zacks Rank #2 SPDR S&P Oil & Gas Exploration & Production ETF could be a good play here.

Renewables

The EIA projects that renewables will double their share of the U.S. electricity generation mix by 2050.
The energy market turmoil of 2022 has forced many countries in Europe and around the world to push for greater energy independence.
Hydroelectric power has been one of our oldest and largest sources of low-carbon energy. Hydroelectric generation at scale dates back more than a century, and is still our largest renewable source – excluding traditional biomass, it still accounts for more than 60% of renewable generation.
More money than ever is being invested in fusion research. Nuclear energy is currently created through fission, or splitting heavy atoms. Fusion, or melding lighter atoms, is the same process that powers the sun and stars. Firms able to produce fusion with abundant elements would likely be the superstars of energy and possibly all of Wall Street.
Hydrogen-based technology is already used to power some vehicles, from your local public bus to forklifts in factories. Nearly all these vehicles utilize fuel cell technology.

These industries have skyrocketing potential:

Giant wind and solar energy producers. Revenue is expected to increase by $6 billion next year. Thankfully, the stock is down 15% off its highs so we’ll enjoy a great entry point.
Renewables powerhouse is already paying big dividends, and yet is targeting annual dividend per share growth of 5% to 8% through 2026.
Solar standout is shaking the industry with an innovative product. The stock is up huge over the past 6 years including 2022, and there’s still tons more upside left.

Source: OurWorldInData

Bottom Line

The Energy sector’s earnings are on track to grow +142.6% this year, which makes the sector responsible for the S&P 500 earnings growth we’ve seen in 2022 year-to-date.
In Q3 2022, total S&P 500 earnings are currently expected to be up +2.0% from the same period last year on +10.7% higher revenues. In Q3 2022, total S&P 500 earnings are currently expected to be up +2.0% from the same period last year on +10.7% higher revenues. But excluding contributions from the Energy sector, Q3 earnings for the rest of the index would be -5.6% below the year-earlier level.
As quickly as energy markets can shift – so can your investments. For all investors: keep an eye on important factors that can protect your investments through market changes.