Life has come full circle for oil stocks in 2023. In 2022, the energy sector of the S&P 500 Index ($SPX) gained 58%, and was the only sector to end in the green as wider markets tanked and tech stocks had their worst year in decades. The energy sector, meanwhile, notched its best-ever year in 2022, as Russia’s invasion of Ukraine helped catapult oil prices to multi-year highs.
This year has been a different ballgame, though - and the energy sector is in the red, ranking among the worst-performing S&P 500 subsectors. Call it a reversal of fortunes, but the tech sector - which was the worst-performing sector last year - is now the best-performing sector in 2023.
Oil bulls saw a flicker of hope in October, as energy prices spiked following the start of the Israel-Hamas war. However, the rally was short-lived, and prices have since fallen to multi-month lows, with West Texas Intermediate (WTI) crude futures for January delivery (CLF24) falling below the psychologically crucial $70 per barrel price level.
While 2023 was a bad year for oil stocks, will 2024 be any better? We’ll explore in this article - beginning with a brief analysis of what’s wrong with oil and gas stocks.
Why Are Oil Stocks Going Down?
The fortunes of oil stocks are closely interwoven with oil and gas prices, and as global energy prices have tanked – so have oil stocks. Here’s why oil prices are going down in 2023:
- Supply glut: There is a supply glut in global oil markets, and soaring U.S. production - which recently hit all-time highs - is also partially to blame. Russia has also reportedly been bypassing Western oil export sanctions through its shadow fleet, which is only worsening the over-supply situation and more than offsetting production cuts by other OPEC+ members.
- Concerns over demand: A slowing global economy is among the major risks for oil prices, as energy demand is interlinked with GDP growth. We have a structural slowdown in China, and the country’s stimulus to boost economic growth has not been to the scale that markets expected. U.S. economic growth has also been tepid, and the world's largest economy is expected to slow further – even as it may dodge the recession that many economists have been predicting. Most global institutions, including the IMF, forecast global growth to slow further in 2024, which could mean lower oil demand.
- High interest rates: While most central banks of consequence have paused their rate hikes, officials have not yet signaled they're looking to reverse the rate-hike cycle anytime soon (except in China, where the PBoC has been cutting rates).
Will Oil Stocks Go Up in 2024?
Whether oil stocks go up in 2024 will eventually depend on the trajectory of oil prices. To be sure, some analysts believe that the worst is over for oil, and it is due for a rebound. For instance, in a recent note, Citi said, “The sector enters 2024 with just one-third the level of leverage of the broad equity market, a relative advantage that the group has not held since the heady oil price days of 2007/08,” and picked BP (BP) and ConocoPhillips (COP) as its top energy sector bets.
Speaking with CNBC, Louis Navellier, chairman and founder of Navellier & Associates, termed energy as his “top conviction call.” JPMorgan also said that it sees “value” in oil and gas stocks, while cautioning that “timing an entry and exit will continue to be critical.”
Warren Buffett Has Been Cutting His Chevron Stake
Meanwhile, even as some analysts believe that oil stocks will go up in 2024, legendary value investor and Berkshire Hathaway boss Warren Buffett does not seem to think so – or at least, that’s what his continued sale of Chevron (CVX) shares tells us.
While Berkshire Hathaway (BRK.B) has upped its stake in Occidental Petroleum (OXY) - and has the regulatory approval to take that stake to 50% - Buffett has sold Chevron shares for four consecutive quarters, after having built a CVX stake over the previous two years. Buffett, incidentally, has been on a stock-selling spree, which has lifted Berkshire's cash pile to a record high.
Should You Buy Oil Stocks for 2024?
Forecasting a commodity like oil can be tough, as multiple geopolitical developments are likely to influence its price action. However, as things stand today, the expected slowdown in demand, coupled with ever-rising U.S. production, does not bode well for oil prices. That said, there could be a tactical buying opportunity in oil stocks after the recent fall - but as JPMorgan also said, timing the entry and exit will be the key.
On the date of publication, Mohit Oberoi had a position in: BRK.B . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
