Energy Stocks Look Cheap if Oil Prices Are an Indicator

Energy Stocks Look Cheap if Oil Prices Are an Indicator

The price of oil has had a strong 2021 run. Oil stocks haven’t fully responded in kind, creating a potential buying opportunity. 

The price of WTI Crude oil is up about 45% year-to-date as reopenings and trillions of dollars of fiscal stimulus have jolted economic demand. 

Energy stocks have also performed handsomely. The 
Energy Select Sector SPDR Fund
(ticker: XLE), which counts oil majors
Exxon Mobil
(XOM) and
Chevron
(CVX) as its two largest holdings, has risen about 30.5% for the year. That outpaces the
S&P 500’s
gain in that time by about 11 percentage points. 

But stock gains for energy companies should be stronger than that, given historical trends. With crude oil recently trading around $70 a barrel, the average S&P 500 energy stock should have outperformed the broader index by several times greater than the outperformance seen in 2021, according to Citigroup data.

The bank’s data show a tight correlation between the price of crude oil and the outperformance of energy stocks, dating back to 1995. Recently, the two have become decorrelated. Now, “the [energy] stocks look underpriced given the rebound in crude,” writes Tobias Levkovich, chief U.S. equity strategist at Citigroup. 

Others on Wall Street have also noted the fairly cheap price of energy stocks. Strategists at Truist recently wrote that energy stocks have been in an “oversold” condition. Just a week ago, none of the S&P 500 energy stocks were trading above their 50-day moving averages.

On the flip side, the relatively disappointing performance of energy stocks could signify that the price of crude oil is bound to drop.

To be sure, investors have recently been grappling with the strong possibility that the U.S. has already seen the fastest economic growth it will see for the current economic expansion, a dynamic that isn’t positive for oil demand. The price of oil—and the energy fund—have both fallen from 2021 peaks hit in July and June, respectively. 

But those who believe in strengthening oil demand can believe in oil stocks from here. 

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

Leave a Reply

Your email address will not be published.

New Brokers
2.8 rating
Buy & sell Crypto in minutes
3.0 rating
Note: Investing involves risks. You can lose your deposit. We advise you to only invest in financial products which match your knowledge and experience.
2.0 rating
Interactive Brokers attracts active traders with low per-share pricing, an advanced trading platform.
4.3 rating
eToro is the world’s leading social trading platform, with thousands of options for traders and investors.
AdonFinance
Risk Warning: The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory or other services by AdonFinance. In addition, the content of the website offers no opinion with respect to the suitability of any security or any specific investment. Trading foreign exchange, stocks, cryptocurrencies and commodities is potentially high risk and may not be suitable for all investors. The high level of leverage can work both for and against traders. Before any investment with any broker you need to carefully consider your targets, previous experience, and risk level. Forex trading can result in the loss of your money, as a result, you are expressly cautioned that you should never invest or trade with money that you cannot afford to lose. For the avoidance of doubt, AdonFinance's service provides Brokers reviews in the Financial market. AdonFinance, its subsidiaries, agents or affiliates will assume no responsibility whatsoever for your trading activity. © Copyright 2021 AdonFinance