The energy sector has recovered this year, driven by the reopening of economies and the subsequent rebound in oil demand. Despite the pullback in oil prices and energy stocks in recent weeks, energy has been the top-performing S&P 500 sector this year. The energy sector has room to rise even more next year, as energy demand is set to continue rebounding. The low valuations of many energy stocks and the handsome yields could make the sector more attractive for investors in 2022, analysts say.
Energy is also one of the industries benefiting from the reopening of economies, strong consumer spending, and economic growth.
Even with intermittent scares of new COVID variants, such as Omicron in recent weeks, analysts do not expect mass lockdowns globally as in the spring of 2020 and do not see—currently—oil demand suffering too much from the Omicron wave.
Energy Sector Top S&P 500 Performer This Year
The energy sector has seen the most gains of any sector in the S&P 500 index this year. Year to date—as of December 13—energy was up 46.3 percent, double the 24.3-percent rise of the index, according to data from Yardeni Research. The second-best performing sector has been real estate with a 36.4 percent gain, followed by information technology with a 31.8 percent increase, and financials, which have gained 30.6 percent so far this year.
The Energy Select Sector SPDR Fund (NYSEARCA: XLE) is up a massive 46.60 percent year to date, while the SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA: XOP) has surged by 64.31 percent.
Investment officers at asset management firms are bullish on the energy sector, saying that stocks and ETFs are looking attractive going into 2022.
Investors and traders believe that energy has even more upside next year.
Energy Stocks Could Continue Making Money For Investors
“For the U.S. to bring supply back up to levels that we saw pre-pandemic, it’s going to take to July of 2023. So I think there’s going to continue to be upward pressure on the price of oil, and I think there are still ways for you to make money in this sector,” Nancy Tengler, CEO and chief investment officer at Laffer Tengler Investments, told CNBC’s Trading Nation program last week.
According to Boris Schlossberg, managing director of FX strategy at BK Asset Management, the Energy Select Sector SPDR Fund (XLE) will continue to offer handsome returns.
“I think you could simply stay long XLE, which has got a beautiful [3.8%] yield right now,” Schlossberg told CNBC.
“Owning the XLE is a no-brainer at this point,” the strategist added.
Nigel Bolton, Managing Director, Co-Chief Investment Officer of BlackRock’s Fundamental Equity Group, believes that stock picking will be the theme in 2022, rather than focusing on value trade or sectors benefiting from the economic recovery such as energy and financials.
“Some of the larger, more incumbent oil companies will be able to change and may have a quite reasonable future from valuation levels that potentially look optically attractive,” Bolton told CNBC’s “Squawk Box Europe” last Thursday.
According to BlackRock’s executive, all sectors will have winners and losers next year.
Recovery And Reopening Favors Energy Sector
One of the five key opportunities in U.S. equities will be sectors linked to the ‘Reopening America’ theme, UBS Wealth Management strategists wrote in a report on tactical U.S. equity themes last week.
“The outbreak of the omicron COVID-19 variant has driven market volatility in recent weeks, particularly for companies tied to the reopening trade. However, we are confident that the economic recovery remains intact, and we expect consumer spending to remain strong,” UBS analysts noted.
“We expect a number of companies to benefit from the continued reopening, including consumer, financial, energy, healthcare, and industrial businesses,” they say.
The world could see the foundations of “a far more vibrant economic environment” and COVID transitioning from a pandemic to an endemic disease next year, JP Morgan said in its recent Outlook 2022, titled ‘Preparing for a vibrant cycle.’
A vibrant economy means robust demand for oil, and JP Morgan even said earlier this month that crude oil prices could soar to $125 per barrel in 2022 and $150 in 2023 due to OPEC’s limited capacity to boost production.
OPEC itself suggested in its latest Monthly Oil Market Report (MOMR) on Monday that recent fears of Omicron slashing oil demand significantly might be unfounded.
“The impact of the new Omicron variant is expected to be mild and short-lived, as the world becomes better equipped to manage COVID-19 and its related challenges. This is in addition to a steady economic outlook in both the advanced and emerging economies,” OPEC said in the report.
Despite the resurging panic over Omicron and the re-introduction of some measures in Europe to fight the spread of the variant, economies and global oil demand are not expected to take a hit from the new strain, OPEC said as it kept its demand growth forecasts for 2021 and 2022 unchanged.
Continued economic recovery next year is good news for energy demand and energy stocks.