ETF Insights| December 1, 2024
Price Action & Performance
The energy sector delivered a solid performance in November, with the S&P 500 Energy Index rising 6.28%, outperforming the broader S&P 500’s 5.73% gain. However, the bullish reversal now visible on the price chart is belied by the failure of the relative curve to make a new multi-month high against the benchmark S&P 500. This calls the potential bullish reversal in the sector into question, and since Crude prices have been trading down to long-term support it is hard to see where the continued driver of outperformance comes from.
The monthly gains for the sector nearing overbought conditions in a weak longer-term trend. Crude prices have moved lower despite conditions that historically put upwards pressure on barrel price. We are skeptical of sustained outperformance from Energy stocks against this backdrop and we are betting on mean reversion for the sector in December.
From an industry and stock level perspective, oilfield services, exploration and production (E&P), and refining and marketing subsectors were notable contributors. XOP (E&P-focused ETF) surged 11.28%, driven by strong gains in gas-heavy operators like Comstock Resources (+34.7%), Gulfport Energy (+27.0%), and Antero Resources (+26.3%). Oilfield services companies also outperformed, with key players such as ACDC (+52.3%), NGS (+41.8%), and SEI (+87.6%) benefiting from increased demand for pressure pumping and capital equipment services. Refining and marketing stocks were bolstered by CVI (+21.7%) and PARR (+12.8%), with major refiners PSX (+10.0%), MPC (+7.3%), and VLO (+7.2%) supporting broader gains.
Economic and Policy Drivers
Despite concerns over geopolitical tensions and macroeconomic headwinds, crude prices stabilized, with WTI down 1.2% to $68.00 and Brent up 0.2% to $72.94. Natural gas saw a notable rally, with Henry Hub (HH) rising 13.4% to $3.368 due to colder weather forecasts, reduced production, and record LNG export flows. Renewed investor interest in nuclear energy and clean tech also contributed to sector momentum, with NuScale Power surging 55%. However, challenges persisted in specific segments, such as EV infrastructure providers, where Wallbox and Blink lagged due to weak guidance.
The election of Donald Trump as the 47th president brought expectations of energy-friendly policies, including deregulation and easing restrictions on domestic production and LNG exports. However, the sector faces uncertainty over potential import tariffs on energy products and stricter enforcement of Iranian sanctions. These measures could impact global supply chains and pricing dynamics. Meanwhile, OPEC+ delayed its production increase decision to December 5, reflecting caution amid weaker Chinese demand, as highlighted by successive downgrades to 2025 demand growth estimates.
Natural gas markets were influenced by production fluctuations, maintenance outages, and record LNG feedgas flows, averaging 13.5 Bcfd. Europe’s natural gas storage fell below the five-year average for the first time this year, driven by colder-than-expected weather. Policy developments such as Trump’s potential lifting of the Biden-era LNG export facility ban and accelerated FERC pipeline approvals may further support the natural gas sector.
Geopolitically, the Israel-Hezbollah ceasefire reduced immediate risks in the Middle East, while China’s reduced reliance on sanctioned crude suppliers like Iran and Venezuela signaled shifts in global trade dynamics. However, concerns over U.S.-China relations, particularly regarding potential export restrictions, continue to pose risks.
Investment Outlook for December
The energy sector enters December with a cautiously optimistic outlook, supported by seasonality, earnings tailwinds, and favorable policy expectations. The anticipated easing of regulatory constraints under the Trump administration could boost domestic production and LNG exports, while geopolitical tensions in the Middle East and Eastern Europe remain key wildcards. Crude prices are likely to find support from steady demand recovery and the potential for OPEC+ to delay production increases. However, elevated inventory levels and global economic uncertainties could limit upside potential. We find these concerns reflected in the price action of the Brent and WTI contracts and we are betting in our own portfolio that those concerns are warranted.
In Conclusion
Despite some rotation away from Mega Cap. Growth, we are skeptical the Energy Sector can continue outperformance with the Crude price so weak. Our Elev8 Sector Rotation Model Portfolio starts December with a zero-weight allocation to Energy leaving us 3.56% BELOW the benchmark S&P 500.
Chart | XLE Technicals
- XLE 12-month, daily price (200-day m.a. | Relative to S&P 500)
- Relative curve falls short of September highs calling bullish reversal into question
XLE Relative to S&P 500 with Industry and Sub-Industry Relative Strength, T3M
Data sourced from FactSet Research Systems Inc.
