- Energy stocks have fallen this year amid the bloodbath in crude oil prices. Last week, WTI crude contract turned negative for the first time in history.
- After the crash, Goldman Sachs sees buying opportunities in the beaten-down sector. However, Morgan Stanley has a dissenting view.
Goldman Sachs says to buy energy stocks
The energy sector was the worst-performing sector in 2019. Previously, the energy sector had the dubious crown of being the worst-performing sector in 2018, 2015, and 2014. Energy stocks’ fortunes are intertwined with crude oil prices. Crude oil prices have fallen this year. Last week, WTI crude turned negative for the first time in history. While prices have recovered, they’re below the price levels we saw at the beginning of the year. Also, many companies are cash negative at these prices. After the crash in energy stocks, Goldman Sachs sees buying opportunities.
Energy sector ETFs’ performance
Looking at the energy sector ETFs’ year-to-date performance, the SPDR Select Sector Fund Energy ETF (NYSEARCA:XLE) has fallen almost 34% this year, while the SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA:XOP) has fallen 43%. The SPDR S&P 500 ETF (NYSEARCA:SPY) has only fallen by about 8%. SPY has recouped most of its losses. The share of energy stocks in the S&P 500’s market capitalization has fallen to almost 2% this year—the lowest level since at least 2000. Top oil-producing companies’ stock prices have followed crude oil lower. Now, Goldman Sachs has given five reasons to buy energy stocks.
Why should you buy energy stocks?
Goldman Sachs has given five reasons to support its thesis.
- Crude oil prices have fallen near or below cash costs.
- There have been significant production cut announcements.
- The demand has bottomed.
- There’s a multiyear low valuation for energy stocks.
- The bad news is already factored in and energy stocks aren’t reacting to “bad micro news.”
Crude oil prices
The slide in crude oil prices started when Russia and Saudi Arabia failed to reach an oil production cut deal. This might sound déjà vu—a similar situation occurred in November 2014. Back then, concerns about China’s slowdown compounded the sell-off in crude oil prices. This time, it’s a global slowdown. The demand has fallen sharply amid the COVID-19 pandemic. To add to that, there’s a scarcity of storage space. The International Energy Agency expects global energy demand to fall 6% this year, which would be the worst on record. In my view, even the expectation of a 6% fall in global energy demand looks optimistic. While Goldman Sachs asked clients to buy energy stocks, some of the other brokerages aren’t as optimistic.
Mike Wilson, the chief US equity strategist at Morgan Stanley, doesn’t recommend a “buy” on energy stocks. However, he’s quite bullish on stock markets—especially on beaten-down sectors like banking and consumer discretionary.