Energy cycles have a way of rewarding investors who show up early, while punishing those who assume the next upturn will look exactly like the last one. Supply disruptions caused by the war in Iran that began just under a month ago have upended markets globally, with oil markets taking center stage. My colleagues Kristian Kerr and Adam Turnquist have each written pieces this month digging into the physical oil market, “Assessing the Impact of Developments in Iran: Watch Energy” and “Oil in the Driver’s Seat as Geopolitical Tensions Rise”, respectively. Our focus is on the equities that are in the oil and gas business (energy stocks), focusing on the individual sub-sectors within the broader energy sector. Energy was the best-performing sector in the S&P 500 before the war broke out, and investor interest has increased as they attempt to underwrite the new geopolitical environment.
Energy investing is rarely hard because the math is complicated, but because cycles mess with judgment. When oil is cheap and the sector is hated, it feels irresponsible to touch it. When oil is expensive and headlines are everywhere, it suddenly feels like the simplest trade in the world. That's typically when investors take the most risk for the least incremental reward.
As with most investing topics, we think the right way to approach energy equity analysis is as a mosaic, with the mind and machine working together to weigh the evidence. You don’t need one perfect indicator, but a set of clues that improve your odds of avoiding two classic mistakes in energy: showing up too late and leaning into the wrong subsector for the environment. What follows is a brief review of energy subsector performance and a framework for thinking about which sub-sectors tend to lead at the onset of an energy investment cycle, including a zoom in on energy sub-sector performance from December’s WTI crude oil closing low to date, with a focus on the before and after of the onset of the Iran War. Finally, we provide a brief overview of each of the main energy sub-sectors.
Important DisclosuresThis material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing. Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk. Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results. This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy. Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. Asset Class Disclosures – International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets. Bonds are subject to market and interest rate risk if sold prior to maturity. Municipal bonds are subject and market and interest rate risk and potentially capital gains tax if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply. Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. They may be subject to a call features. Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses. Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk. High yield/junk bonds (grade BB or below) are below investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors. Precious metal investing involves greater fluctuation and potential for losses. The fast price swings of commodities will result in significant volatility in an investor's holdings.
This research material has been prepared by LPL Financial LLC. Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations | Not Bank/Credit Union Guaranteed | May Lose Value | Securities and Advisory Services offered through LPL Financial, a Registered Investment Advisor. Member FINRA & SIPC. The LPL Financial Advisor associated with this website may discuss and/or transact business only with residents of the states in which they are properly registered or licensed. No offers may be made or accepted from any resident of any other state. Tracking #1084398