Are We Looking At An Early Noughties-Esque Energy Rally?

Are We Looking At An Early Noughties-Esque Energy Rally?
Stéphane Renevier, CFA

almost 2 years ago1 min

Mentioned in story

Energy stocks have been rallying sharply in the last few months, outperforming the broader market by more than 50% this year. And they may well have a lot more room to run, with the potential even to rival the bull market of 2002-2008 when they outperformed the S&P 500 by almost 300%.

There are a few reasons to be optimistic. Energy producers have been underinvesting in exploration and production for years, meaning they’re now unable or unwilling to produce the quantities of oil and natural gas required even as prices have risen. That supply shortage is likely to be with us for a while, which means higher energy prices are likely to hang around too. That should boost profits and investment in the sector. Consider too that energy stocks are broadly undervalued relative to the wider market, and investors might be keen to buy in while the going’s cheap.

Of course, there are risks to the rally. The first is that demand could drop if global economic growth slows down, as it’s expected to do sometime soon. The second is that the strength of the rally could be tested as prices approach key historical resistance levels, when investors start to get itchy feet. And third, supply will eventually recover, which may lead to lower oil prices and cap the upside for energy stocks.

Still, the risk/reward makes energy stocks a lot more interesting than the broader market, and betting the trend will continue could prove a winning trade. So if you’re keen, you could buy the Energy Select Sector SPDR Fund (ticker: XLE, expense ratio: 0.10%) to get exposure to the whole sector in one fell swoop.

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