Why Energy ETFs Are Lagging In 2023
Last year’s best-performing exchange-traded funds are this year’s worst.
Energy stocks, as measured by the Energy Select Sector SPDR Fund (XLE), have lost 8% so far this year, after last year’s 64% gain. For context, the S&P 500 lost 19.4% in 2022 and is up 3.6% year to date.
While an investment may be expected to give back some gains after a period of eye-popping returns, a routine pullback isn’t the only explanation for energy’s 2023 weakness. More broadly, the market has shifted away from value stocks and toward growth stocks this year.
The pivot hasn’t been huge—the excesses of 2020 and 2021 certainly haven’t returned. Just note that the Vanguard Value Index Fund ETF (VTV) is down 4% this year, while the Vanguard Growth Index Fund ETF (VUG) is up by 13% this year.
That’s a significant differential that works against energy stocks, most of which fit into the value bucket.
The sector makes up 7.8% of VTV and only 1.7% of VUG.
Oil Slides
Another factor working against energy this year is the slide in energy prices. Though it’s rebounded above $70 in recent days, the price of the crude oil benchmark WTI is down 9% this year.
The price of U.S. natural gas has done even worse, losing more than half of its value since the start of the year.
Obviously, falling oil and gas prices translate into lower earnings for energy companies in most cases.
And at least in the short term, these dynamics are unlikely to change. In its March Oil Market Report, the International Energy Agency noted that global oil inventories surged at the start of this year, reaching their highest level since September 2021.
The agency forecast that “world oil supply should comfortably exceed demand in the first half of the year.”
OPEC is also reportedly unlikely to act to support prices at its meeting next week. The producer group probably won’t change its output targets this year, according to comments by Saudi Arabia’s energy minister Prince Abdulaziz bin Salman.
Natural Gas Plunges
Meanwhile, the outlook for U.S. natural gas prices in 2023 is dismal. A warm winter and rising supply have depressed prices and caused analysts to slash price forecasts.
“Given a normal-weather summer (or even one standard deviation hotter), natural gas futures likely need to incent shut-ins through the summer,” analysts at Jefferies recently said, suggesting that natural gas prices need to be low enough to incentivize producers to shut down their wells temporarily through the summer. “Natural gas prices may need to settle below $2/Mcf (one thousand cubic feet) for multiple months.”
Today, U.S. natural gas prices are hovering just above that $2 level, a far cry from the nearly $10 level at which they briefly traded last summer, when Europe was scrambling to get its hands on every spare molecule of natural gas it could.
Since then, European natural gas prices have fallen 86% and the continent’s demand for U.S. liquefied natural gas isn’t nearly as strong as it was.
All this suggests that 2023 will be more challenging for the energy sector than 2022. On the bright side, the IEA anticipates things could start to look up later this year, especially for oil.
The agency forecasts that the market will swing “into deficit during the second half of the year when China is expected to drive world oil demand to record levels.”
Email Sumit Roy at sumit.roy@etf.com or follow him on Twitter @ sumitroy2
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