Why Energy Stocks Might Continue to Underperform

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Energy is taking its cue from crude prices

Energy does not ignore lower regulations and political goals, but it seems to be more in its own world now than other sectors. Given that the energy sector is still recovering from the precipitous fall in oil prices from mid-2014 to early 2016, multiples before the election were already stretched at 37x. However, the sector itself moved only 3%. This small change could be due to the sector still appearing expensive because of trough valuations even though oil prices have risen since the election. The next move will be a call on global supply and demand, but you can be ready either way with ERX (3X Energy Bull) or ERY (3X Energy Bear).

Why Energy Stocks Might Continue to Underperform

Market Realist

Energy stocks (ERX) (ERY) rose significantly in the first few weeks after Donald Trump was elected president. Trump has proposed to aggressively expand opportunities by bringing more federal land under crude oil and natural gas drilling and open new markets for the energy sector. He has promised to improve the coal industry, which has been struggling for a while.

He has also pledged to help energy companies by encouraging more drilling and reducing regulations. He could remove regulatory restrictions on oil and gas exploration and production. However, more production would be bearish for crude oil, with the supply glut already containing oil prices.

However, despite much lower oil (USO) prices, energy valuations remain high, partly due to negative earnings in some energy stocks. That could explain why the energy sector has risen only 3.0% since the elections.

While the number of rigs has fallen, production remains high due to higher efficiency. That’s countering OPEC’s (Organization of the Petroleum Exporting Countries) cut of 1.2 million barrels per day. OPEC may have to extend its self-imposed cut in order to reduce the supply glut. Where oil prices go now depends on whether the demand for oil, especially from Asia, increases.