Oil and gas companies were the only bright spot in a desolate first half of the year for the US stock market, as the energy sector benefits from rising commodity prices driven by the war in Ukraine.
The S&P 500 energy sub-index, made up of 21 major oil and gas groups, rose nearly a third in the first six months of the year, offsetting a trend in which the broad market recorded its worst half in more than 50 years.
The 29% increase added more than $ 300 billion in market capitalization to the sector, while the broader index lost more than $ 8 billion, or 21%.
“This is a massive, massive superior performance,” said Pavel Molchanov, an analyst at Raymond James. “To put it bluntly, energy is the best performing sector in the stock market so far.”
The trajectory of oil and gas stocks closely reflected an increase in commodity prices, which were already rising until 2022, as supply lagged behind rising demand as economies recovered from the blows of the coronavirus pandemic. But Russian President Vladimir Putin’s February decision to send troops to Ukraine has caused prices to rise as Western nations impose sanctions and strive to find alternatives to Russian imports.
West Texas Intermediate, the U.S. crude marker, has gained more than 40 percent this year to trade around $ 106 at the end of June. U.S. reference hub Henry Hub added about 60% to quote at $ 5.70 per million British thermal units.
This has allowed U.S. oil and gas groups, from drillers to refineries, to benefit from a cash boom that has sparked political outrage as consumers pay record prices at the pump. President Joe Biden recently said that ExxonMobil, the largest U.S. producer by value, “made more money than God this year.”
However, not everything has been positive for the sector. Energy stocks found themselves at the end of a broad sell-off last month, fueled by growing fears that rapid interest rate hikes will push the U.S. into recession. Oil and gas were the S&P’s worst performers in June, with a 17% drop as oil and gas prices fell.
Fred Fromm, who runs a natural resource investment fund at Franklin Templeton, said it was “not surprising” to see a setback after the previous increase, but said the long-term pressures they had raised the actions had not changed.
“The US has not been the main driver of oil demand growth for a decade or more … We believe that even during a period of slower economic growth or a slight contraction, other demand factors such as reopening of China largely compensates for it. “
Demand concerns caused by coronavirus blockages in China, the world’s largest oil importer, had been a pressure on prices as they were rising earlier this year.
The strong performance of oil and gas stocks during the first half of 2022 marked a sharp change of fortune for a sector that has been going on for years. Energy was the worst-performing index in the S&P 500 over the past decade, as debt-fueled drilling days caused heavy losses, prompting investors to leave the sector en masse.
But the industry says it has changed its ways and is now focused on capital discipline and shareholder returns. According to Raymond James, capital spending by the world’s top 50 producers will be just over $ 300 billion this year, nearly half from the record $ 600 billion in 2013.
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Despite the weaker performance in June, analysts and investors believe that the resurgence of oil and gas will continue during the second half of the year, as the conflict in Ukraine continues to cause supply problems.
“As long as the war continues, oil prices are likely to remain above $ 100 a barrel, meaning that the profitability of almost all of the oil value chain will be at or near all-time highs.” said Molchanov.
“There are a lot of unknowns, more than I’ve ever seen before,” added Fromm, who said he hoped energy stocks could remain volatile in the coming months. “But any weakness that causes us to look at it as a potential buying opportunity.”