Is the Energy Sector Truly Underestimated?

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Global Stock Market Trends

In recent years, most global stock sectors have experienced significant growth in returns.

However, the energy sector stands out as one of the least performing, if not entirely negative.

Energy Sector Performance

In the last six months, the energy sector was the sole segment to record negative performance, with a decline of nearly -7%, largely concentrated in the last three months.

In contrast, the same quarter witnessed the S&P 500 grow by almost 8%, primarily fueled by the utilities sector, which benefited from renewed concerns over economic contraction and political instability linked to the upcoming U.S.
presidential elections.

Moreover, the technology sector also continued to show seemingly inexplicable growth.

The Energy Sector Mystery

Why is the energy sector the only one remaining in the negative? It appears paradoxical, considering that a key subject of economic discussion lately has been inflation, largely driven by rising energy costs, especially in Europe, where geopolitical conflicts and sanctions against Russia have worsened the situation.

However, the current energy market is facing an almost opposite phenomenon: a wave of “deflation”.

Recent Data & Energy Prices

According to the latest data from the Consumer Price Index (CPI), the energy component showed signs of slowing down.
In the last quarter of 2024, the energy contribution to the CPI saw a decline of 2.1%, alongside significant reductions in oil prices and other energy sources.

This decrease has directly impacted the performance of sector companies, which heavily rely on the prices of commodities such as oil and natural gas.

Link Between Commodities and Energy

The companies listed in major energy stock indices primarily operate in the oil and natural gas sectors and are therefore closely linked to the pricing trends of these commodities.

In the last six months, crude oil prices (USOIL) plummeted by around 20%, while natural gas remained relatively stable.
This heavy dependence on oil price trends has hindered many companies in the energy sector, contributing to their underperformance compared to other S&P 500 sectors.

Examining Key Energy Companies

For example, the Energy Select Sector SPDR Fund (XLE), the number one ETF for assets under management (AUM) in the energy sector, has disappointingly underperformed compared to other segments.

With an AUM exceeding $40 billion, XLE serves as a significant indicator of the energy sector’s health.
This ETF is heavily exposed to major oil and natural gas companies.

Let’s take a closer look at the top three companies that form the backbone of this ETF: ExxonMobil (XOM), Chevron (CVX), and ConocoPhillips (COP).

Performance Analysis

Considering the performance of the XLE ETF, one can observe a substantial decline over the past quarter.

While the S&P 500 achieved an 8% increase during the same timeframe, XLE experienced a contraction close to 7%, mirroring the decline in oil prices.

This reinforces the tight correlation between energy commodity prices and the performance of energy companies.

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