Energy sector seeks oil momentum

  • Energy sector down in 2023 after blockbuster 2022
  • Crude oil still in multi-month consolidation
  • Morgan Stanley & Co. cites dueling supply-demand factors

Traders and investors who benefited from the energy sector’s position as the strongest S&P 500 (SPX) sector over the past two years may have gotten a little frustrated recently, or at least puzzled. With the SPX up around 4% for the year as of Wednesday, the S&P energy sector was down roughly the same amount—one of only four sectors with negative year-to-date returns.

Over the past 15 years, no sector has stayed atop the S&P rankings for three consecutive years (see “As the sectors turn”). So, in one sense, the energy space could be seen as the victim of its own success—i.e., what goes up eventually comes down, at least partially. But that ignores a more fundamental part of the story—oil prices.

After spot US crude oil prices got back to their pre-pandemic levels around $60/barrel in February 2021, the market doubled over the next 12 months, topping $120 in March 2022 and again in June—and oil stocks went along for the ride. But crude subsequently pulled back to around $77 by late September, ultimately retreating close to $71 by December.

Commodities and commodity stocks aren’t the same thing, but whether the energy sector escapes its doldrums will likely hinge on oil breaking out of its own range.

After being up as much as 64.5% in 2022, US spot crude closed at $80.26 on December 30—up a little less than 7% for the year. Meanwhile, S&P 500 energy sector ended last year with a 66% return, underscoring the reality that commodities and “commodity stocks” are not the same thing, even if the prices of the latter are typically correlated to the former over time.

As the following chart of April WTI crude oil futures (CLJ3) shows, oil prices have arguably been in a trading range since late September—and they have certainly been in one since December, with the April futures never once closing below $72 or above $82:

Chart 1: April WTI crude oil (CLJ3), 5/26/22–3/8/22. Crude oil futures price chart. Oil in limbo.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)

Whether the energy sector escapes from its doldrums will likely depend on whether oil can break out of its own range. In recent weeks, Morgan Stanley & Co. analysts upped their 2023 demand forecast for oil (citing momentum in China’s reopening, among other factors), but tempered that potentially bullish scenario because of higher-than-expected supplies from Russia.1 The net result was a roughly 10% downward revision of their previous price target for Brent crude oil (the European/global price benchmark, currently trading at a $5–$6 premium to WTI crude) in the second half of the year, from $100–$110 to $90–$100.

Market Mover Update: Two days after closing at a six-week high above $80, April WTI crude oil futures were back near the middle of their trading range yesterday, ending the day below $77.

Kala Pharmaceuticals (KALA) continued its recent run of appearances on the LiveAction scan for biggest percentage gainers, rallying more than 18% intraday on Wednesday.

With the monthly jobs report coming out tomorrow morning, two of yesterday’s labor market data points—the Job Opening and Labor Turnover Survey (JOLTS) and the ADP Employment Report—both came in stronger than expected.

Today’s numbers include (all times ET): Challenger Job-Cut Report (7:30 a.m.), Weekly Jobless Claims (8:30 a.m.), EIA Natural Gas Report (10:30 a.m.).

Today’s earnings include: BJ's Wholesale Club (BJ), Ulta Beauty (ULTA), DocuSign (DOCU).


Click here to log on to your account or learn more about E*TRADE's trading platforms, or follow the Company on Twitter, @ETRADE, for useful trading and investing insights.

1 Reuters. Morgan Stanley ups 2023 oil demand growth estimate by 36%, flags Russia risk. 2/22/23.

What to read next...

A real-world example shows some of the key differences between these related strategies.

Market halts skid as traders prepare for jobs report and key congressional testimony.

A spread strategy offers an alternate near-term price forecast for a software stock.

Looking to expand your financial knowledge?