Demand and Geopolitical Uncertainty Are Boosting the Energy Sector In A Banner Start to the Year – The Average Joe
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    Demand and Geopolitical Uncertainty Are Boosting the Energy Sector In A Banner Start to the Year

    Noah Weidner

    April 22, 2024

    Four years back, global markets stood still as US oil prices plunged into the red for the first time — hitting negative $30 on Apr. 20, 2020. This collapse spelled doomsday for industry powerhouses like Shell ($SHEL) and British Petroleum ($BP), which boldly declared that the world had finally reached peak oil demand. Luckily for them, they were wrong.

    Greasing the stocks: Two years later, oil demand not only bounced back but surpassed pre-pandemic levels with record back-to-back years of demand that sent oil and gas giants like Exxon Mobil ($XOM) and Chevron ($CVX) to new heights. That’s helped the Energy Select Sector SPDR Fund ($XLE), which tracks US energy names, soared over 50% in 2021 and another 60% in 2022. The sector continues to lead the market to start 2024 — up 14% year-to-date (YTD) and closing in on an all-time high.

    • With geopolitical tensions rising, US oil prices have remained steady at $85, thanks to overseas oil cartels like OPEC+ controlling supply while US producers continue to take advantage of high prices by increasing production.
    • The US remained the world’s largest oil producer, keeping domestic oil prices lower than other countries, thanks to strong domestic production.

    Power tripping on big deals

    Oil heavyweights have invested billions in recent years to prepare for life after oil — with a particular focus on natural gas, which is anticipated to see a 50% surge in demand over the next 15 years. To capitalize on this opportunity, leaders are merging with other domestic natural gas and crude oil producers in hopes of maximizing their gains — with deals reaching their highest point since 2012 last year.

    • ExxonMobil announced it would acquire Pioneer Natural Resources ($PXD) in a $64.5B deal — while competitor Chevron announced a $60B deal for Hess ($HES).
    • Diamondback Energy ($FANG) — the ninth-best performing stock in the S&P 500 this year — is up over 30% YTD after revealing a $26B merger with Endeavor Energy.

    Oil’s well doesn’t always end well: Before you rush to buy energy stocks, it’s worth singling out that investors are currently valuing the industry at a significant discount to the rest of the S&P 500, with a 12.8x price-to-earnings ratio — potentially signaling a slowdown in the oil and gas market. FactSet’s latest Earnings Insight warns that modestly lower energy prices are expected to hamper the sector’s earnings in Q1, but analysts have upgraded their outlook for the remaining quarters of the year due to growing power demand and global uncertainty.

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