Key takeaways
Coming off a year of negative returns in 2023, energy stocks are off to a better start in 2024.
Although it modestly lags the broader stock market on a year-to-date basis, the energy sector is producing gains so far this year.
Energy prices are a mixed bag, with oil prices up while U.S. natural gas prices are down.
Energy stocks, which represent one of the more volatile sectors of the equity market, showed signs of recovery in early 2024 after significantly underperforming the broader stock market in 2023. Energy stocks declined 1.33% for the year ending December 2023, while the S&P 500 gained 26% over the same period. In the first 2+ months of 2024, S&P 500 energy sector stocks rose 6.39%, somewhat underperforming the broader S&P 500’s return of 7.61%. The uptick in energy stock performance comes as inflation appears to be subsiding and prices for crude oil and natural gas have declined significantly. In contrast to returns in 2023 and so far in 2024, the energy sector gained 65.72% in 2022 and 54.64% in 2021.1
How energy stocks respond to price trends
Since energy prices peaked in 2022, they have generally been on a downward slide. Such a development tends to be reflected in energy stock performance. The 2021-2022 surge in energy stocks came at a time when oil prices trended much higher, peaking at more than $120/barrel in 2022. But in 2023, oil prices were flat to lower,2 and energy stocks followed suit. Today, prices for various energy products are down significantly from 2022 peaks.
The recent energy price slump
| Category | 2022 Peak Price | Recent Price | % Change |
|---|---|---|---|
| Crude Oil (barrel) | $123.64 | $79.67 | -35.6% |
| Gasoline (gallon) | $5.01 | $3.38 | -32.5% |
| Natural Gas (mil. Btu) | $9.48 | $1.51 | -84.7% |
| Heating Oil (gallon) | $5.15 | $2.64 | -48.7% |
Category Crude Oil (barrel)
2022 Peak Price $123.64
Recent Price $79.67
% Change -35.6%
Category Gasoline (gallon)
2022 Peak Price $5.01
Recent Price $3.38
% Change -32.5%
Category Natural Gas (mil. Btu)
2022 Peak Price $9.48
Recent Price $1.51
% Change -84.7%
Category Heating Oil (gallon)
2022 Peak Price $5.15
Recent Price $2.64
% Change -48.7%
All prices published by U.S. Energy Information Administration. Crude Oil Prices: West Texas Intermediate (WTI) – Cushing, Oklahoma. Gasoline: U.S. Regular All Formulations. Natural Gas: Henry Hub Natural Gas Spot Price. Heating Oil: No. 2 Heating Oil Prices: New York Harbor. Recent price is the latest prices reported as of March 1 to 11, 2024. All data retrieved from FRED, Federal Reserve Bank of St. Louis.
What do prospects for the energy sector look like for the remainder of 2024 and beyond? How should investors view opportunities in this specialized segment of the market representing a critical part of the global economy?
Energy’s shifting profile in the stock market
The energy marketplace is undergoing a transition. In the 1970s, when oil prices first started spiking in the wake of the Arab oil embargo and various Middle East conflicts, the energy sector represented approximately 15% of the broader U.S. stock market. Today, it makes up less than 4% of the S&P 500 index.1 “Those numbers might suggest that it is an industry in decline, but in reality, energy consumption is up since the 1970s, and the important role energy plays in the broader economy is not diminished,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “From an earnings (profit) perspective, energy stocks play a more prominent role in .” Haworth estimates that close to 10% of the index’s earnings are generated by energy stocks.
“While an increasing number of firms are focused on renewable energy projects, the primary investment opportunities in the energy sector today are with more traditional participants such as oil and natural gas companies,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management.
World oil consumption continues to trend higher with the notable exception of a decline in 2020 as world economies slowed due to the COVID-19 crisis.3
While energy stock performance is somewhat tied to the direction of oil prices, Haworth says bottom line results for companies can hold up even if oil prices don’t. “Prices have a major impact on companies that find and produce oil,” says Haworth. “But oil refiners make money from the spread between oil prices and gasoline prices. Storage and transportation company earnings are more affected by the volume and flow of energy.” Haworth also points out that about one-third of the S&P 500’s energy sector is composed of natural gas companies, a market where pricing generally moves independently from oil price trends. Natural gas prices are driven more by domestic supply and demand rather than global market trends.
The slow transition in the energy sector
Renewable energy sources, particularly wind and solar, are slowly gaining a foothold in world energy production, but the role remains modest today. In the U.S., for instance, as of 2022 (the most recently published data) only about 21% of electricity generation comes from renewable sources (including wind, solar and hydroelectric power), with more than 60% still originating from fossil fuels (mainly natural gas and coal).4
On a worldwide basis, renewables represent less than 15% of all electricity production.5 “Alternatives like wind and solar are not a factor in the S&P 500 Energy Index to this point,” says Haworth. “In some cases, they may be represented in other sectors of the market, such as utilities or information technology.”
Efforts are also underway to reduce greenhouse gas emissions by converting fossil fuel-driven automobiles to electric vehicles (EVs), but it is a slow transition. Currently, EVs account for less than 10% of the U.S. car market.6 “Even as the world tries to transition to more EVs, oil demand will still be a factor going forward,” says Haworth. “For example, traditional forms of energy are still needed to power mining activities for minerals required to produce batteries used in electric cars.” Other industrial uses also require fossil fuels to generate sufficient power to meet their needs.
“While an increasing number of firms are focused on renewable energy projects, the primary investment opportunities in the energy sector today are with more traditional participants such as oil and natural gas companies,” says Haworth.
Recent trends put more pressure on oil stocks
Declining oil prices contributed to the energy sector’s underperformance in 2023. A barrel of crude oil was priced in the $80 range at the start of 2023, down considerably from 2022’s peak price of more than $120/barrel. By January 2024, the price hovered near $70/barrel.2 Prices moved back up close to the $80/barrel range in early March 2024. “Prices are trending a bit higher so far in 2024,” says Haworth, “but it’s generally been a quiet start to the year.”
Speculation arose that energy prices could rebound when, in late 2023, Yemeni-based Houthi militants began attacking cargo ships on the Red Sea. Cargo ships carrying crude oil are frequent targets, leading some shippers to divert traffic via much longer routes. However, the overall impact of the attacks seems limited. “Supply disruptions to this point have not been significant, and oil demand remains relatively soft, which is typical in the winter months,” says Haworth.
While in the past the U.S. seemed more susceptible to geopolitical flareups, particularly in the oil-rich Middle East, that is less the case now as the U.S. is no longer a net importer of oil and other petroleum products.7
Investment considerations in today’s energy market
Money invested in the energy sector today is primarily directed toward more traditional companies that participate in industries like oil and natural gas. While the price of resources such as oil and gas can have an impact on company results and stock performance, Haworth emphasizes that opportunities can be found even in a market featuring more stable prices. “Many exploration and production companies have productive oil wells and should be able to generate solid profit margins,” says Haworth. “Since many companies tend to return capital to shareholders in the form of dividend payouts, their stocks represent an opportunity for income-orientated investors.”
Other opportunities can be found in what’s referred to as the midstream energy sector, involved in the transportation of crude oil or refined petroleum products. This sector is less dependent on energy prices than on the flow of oil. Midstream companies tend to pay attractive dividends. However, the investment process can be more complex as it sometimes requires investments in limited partnerships. They require issuance of K-1 forms to investors for tax reporting purposes, which can complicate an investor's tax filing process.
Alternative investments, such as renewables like wind and solar, are less visible in the investment markets. Utility companies emphasizing renewable energy sources offer one opportunity to pursue this part of the market. Some manufacturers of wind or solar equipment also offer opportunities, but they are far more limited than more established, traditional energy companies.
Energy stocks will play a modest role for those who invest in an index fund or ETF replicating the S&P 500 Index. Beyond that, consider consulting with your financial professional to determine whether more targeted investments in the energy sector can help you meet your long-term financial goals.
Frequently asked questions
Investors gain modest exposure to the energy sector through investments in an S&P 500 index fund or ETF, though the energy sector today represents less than 4% of the S&P 500 Index. Choosing to invest in specific energy stocks or an energy sector fund or ETF offers potential to more directly capitalize on this sector. However, it’s important to recognize that energy stocks can experience significant fluctuations in value. For example, S&P 500 Energy sector gained nearly 55% in 2021 and nearly 66% in 2022 before experiencing a modestly negative return in 2023.1 Investors need to be aware of the potential for variable returns in the sector.
Some energy stocks typically perform better when prices rise for underlying commodities such as crude oil and natural gas. In that sense, investors may be in a position to benefit from owning energy stocks during inflationary periods. However, not all energy stocks perform the same. Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management says bottom line results for companies can hold up even if oil prices don’t. “Prices have a major impact on companies that find and produce oil,” says Haworth “But oil refiners make money from the spread between oil prices and gasoline prices. Storage and transportation company earnings are more affected by the volume and flow of energy.” Haworth also points out that about one-third of the S&P 500’s energy sector is composed of natural gas companies, a market where pricing generally moves independently from oil price trends. Natural gas prices are driven more by domestic supply and demand rather than global market trends.
Though renewables such as solar and wind power are playing a bigger role in the world’s move toward decarbonizing energy generation, investment opportunities may be limited. On a worldwide basis, renewables represent less than 15% of all electricity production.5 “Alternatives like wind and solar are not a factor in the S&P 500 Energy Index to this point,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. Utility companies emphasizing renewable energy sources offer one opportunity to pursue this part of the market. Some manufacturers of wind or solar equipment also offer opportunities, but they are far more limited than more established, traditional energy companies.
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